Despite President Joe Biden’s commendable stance on maintaining the political independence of the Federal Reserve, his Democratic allies in Congress have not followed suit.
Sen. Elizabeth Warren (D-MA) has repeatedly criticized the Fed’s independent monetary policy, urging a cut in interest rates despite inflation still being nearly twice the Fed’s 2% target.
Warren argues that high rates risk a recession and claims that current interest rate policy is driving up housing and auto insurance costs, which she says are the main drivers of the overall inflation rate.
However, auto insurance prices actually fell by 0.3% last month, even with the federal funds rate at a 23-year high. The drop in car insurance prices follows the pandemic-driven surge in car prices due to supply chain shortages and high demand.
The claim that the Fed is driving up housing costs is more complex. Increased mortgage rates are reflected in higher home list prices and the Bureau of Labor Statistics’ measure of “owners’ equivalent rent of primary residences.” Yet, rental prices have diverged from home ownership costs, with both showing similar inflation rates.
Home prices, influenced by demand and supply shortages due to restrictive zoning, are seeing a modest decrease. The average home price has dropped from a 2022 peak of $525,100 to $513,100, and the median price from $442,600 to $420,800. According to the IMF, home prices have fallen by 2.4% since last year, despite being up nearly 20% since before COVID-19.
While the BLS reports that inflation is finally slowing, with CPI inflation over 3%, PCE inflation above 2%, and “supercore” inflation close to 5%, a single good data point does not justify cutting interest rates without risking a resurgence in inflation.
Warren’s call for rate cuts appears more politically motivated, with the Fed previously projecting three rate cuts this year while investors anticipated more than twice as many. Currently, treasury futures suggest only one rate cut before Election Day. Warren’s appeal may not influence the Fed, but it signals to Democrats that they can blame the Fed if Biden’s policies fail.
