Democrats are beginning to feel comfortable about the direction of the economy, with a five-month downtrend in prices and less aggressive action on interest rates signaling a potential reversal in wealth.
“I think we’re in a better moment, I think we’re in a better moment,” Sen. Jon Tester (D-Mont.), who sits on the Banking Committee, said Wednesday, warning that “inflation is [something] we still have to take care of it.”
Democratic moderate Joe Manchin (W.Va.), who has broken with his party on multiple economic legislative initiatives, agreed: “We’re going in the right direction.”
While Democrats have emphasized the strength of the economy while Republicans have played up its weaknesses, both parties are seeing some improving conditions.
Rep. Brett Guthrie (R-Ky.), a member of the House Energy and Trade Committee, only lamented the timing.
“A fall in inflation is always good, I just wish it was the way it was before President Biden took office,” he said.
“It’s slowly moving in the right direction,” Senate Banking Committee member Mike Rounds (RS.D.) said in an interview on inflation. “But the reality is that this is a policy-caused problem, and policy should change it.”
Amid widespread warnings of a 2023 recession and associated job losses, the Labor Department said on Tuesday that companies are charging consumers prices in November that are 7.1 percent higher than the previous November. That’s still near a decade-high, but it’s down from 7.7 percent in October and 9.1 percent in June.
“7.7 [percent inflation] to 7.1 is pretty good,” Manchin said on Wednesday.
As a result, the Federal Reserve on Wednesday slowed the pace of its rate hikes for the first time since it began raising rates in March, raising the federal funds rate by 50 basis points instead of 75 as it did in its last four meetings.
“The Fed — God bless them — they were AWOL for much of last year through the end of the summer, and then they got religion and behaved admirably,” Senate Finance Committee member Tom Carper (D-Del.) said in an interview .
Carper said the week’s inflation numbers were “very encouraging” and showed “we’re on the right track.” He noted that job growth remains strong.
But Democrats are not entirely in agreement on how the Fed should proceed.
When asked whether the Fed should stop raising rates at its next meeting, Tester said he thinks the central bank will go ahead and push for a revised median target rate of 5.1 percent next year.
“I talked to [the Federal Reserve chair] last week, and they don’t intend to do anything unless it changes dramatically for some time,” he said.
“The Fed has to do its job. They were slow to come out of the gate and they’re doing their job now,” Manchin added.
Other Democratic lawmakers have said it’s time for the Fed to halt rate hikes altogether to avoid risking a recession.
“I think the Fed should stop raising rates,” Ted Lieu (D-Calif.) said Wednesday. “What you saw was an increase in inflation due to the pandemic. And now that the pandemic has subsided and the United States and countries around the world are getting their supply chains back up and running, and now that we have very few countries other than China that have any pandemic restrictions, we’re at a place where we no longer need rate hikes.”
Republicans have criticized the US’s economic performance during the pandemic, drawing attention to how stimulus packages passed by the Democratic-controlled Congress have likely boosted demand for goods while stalled supply chains made them harder to get.
“I think the Fed has done the only thing I can think of that it can do with a very blunt instrument, which is interest rates. I think they’re probably going to continue for a while,” Rounds said.
A key concern for economists now is whether the Fed’s rising interest rates, designed to curb demand by making transactions more expensive across the economy, will eventually trigger a recession.
Forecasts of a deep recession peaked over the summer, and the decline in gross domestic product over the first two quarters led many Americans to believe a recession had already begun.
But some market commentators have begun to soften their language, and some lawmakers are following suit.
“I think we’re going to have a recession next year, but it’s going to be very shallow and it’s not going to last more than two quarters,” Senate Finance Committee member Chuck Grassley (R-Iowa) said Wednesday, echoing recents Comments from Bank of America CEO Brian Moynihan said he expects a “mild recession” in 2023.
Other segments of the banking industry have also told Congress the economy is holding up.
“I recently met with some CEOs from some banks. They say banknotes are doing well, there are no red flags shocking the banking community at the moment to signal a downturn in the economy. I know you hear pundits talking about this on TV, but the fact of the matter is our economy is booming,” Rep. Vincente Gonzalez (D-Texas), a member of the House Financial Services Committee, said on Wednesday.
Gonzales said banks don’t see much of credit card defaults, which are one of the first signs of an economic downturn.
“One thing they mentioned is that people who were in trouble before the pandemic are now borrowing again. And they saw that maybe some of the people with lower credit histories are the first people to appear [getting] some small loans across the country,” he said.
Economists say they expect consumer spending to continue, which should also help stave off a recession.
“The labor market remains very strong, employment is increasing and [workers] to see healthy (perhaps too healthy) wage increases. As inflation slows, workers have rising real wages, most of which they will spend,” Dean Baker, an economist at the Center for Economic Policy and Research, wrote in an email to The Hill.
“With strong consumption, strong investment, and fast falling inflation, it all looks like a pretty good picture unless the Fed goes nuts with raising rates.”