(Yahoo! Finance) - A new wave of political pressure greeted Fed Chair Jerome Powell as he and his colleagues gathered in Washington this week to discuss the direction of interest rates, and a cooler-than-expected inflation reading Wednesday amplified that scrutiny.
From the left, the immediate reaction from Sen. Martin Heinrich, the chair of Congress's Joint Economic Committee, was to proclaim "it’s time" for the Fed to lower rates "before it causes irreparable harm to the US economy."
The sentiment was echoed earlier in the week in the form of two new letters from other liberal lawmakers pushing in the same direction. One letter, led by Sen. Elizabeth Warren, concluded by telling the central banker, "You have kept interest rates too high for too long."
The release of the Consumer Price Index (CPI) for May showed prices remained flat over April and rose 3.3% over the prior year. It was good news for price-weary consumers and could ease the economic pressure on the central bank to keep interest rates high.
The pressure from the left has also been matched in recent days by commentary from the right.
GOP presidential candidate Donald Trump again raised the prospect of putting Powell out of a job late last week. "I know a lot about firing people," the former president teased in an interview with a TV station in Arizona.
But the political noise from both sides may have a limited impact, at least for this week.
Powell and his colleagues remain widely expected to keep rates steady for now and then revisit the issue in July. That's partly because of the limited leverage these politicians hold at the moment but also in large part by Powell's own design.
The central banker has long set "data driven" benchmarks (and tried to adhere closely to them) to avoid the fate of predecessors seen as too susceptible to changing political winds.
Desmond Lachman describes the overall strategy from Powell as essentially backing oneself into a corner — intentionally.
"Given the way he's set this thing up, the bar is going to be very high for him now to cut interest rates before the election," said Lachman, a former managing director at Salomon Smith Barney currently at the American Enterprise Institute.
"That's really the box that he's put himself into," Lachman added.
There's also little these critics can do at the moment. Trump has been clear that if he wins, Powell will be out of a job no matter what he does, but the question is whether Trump would take the destabilizing step of firing him or simply letting his term expire.
Mark Spindel, the chief investment officer of Potomac River Capital and a Fed historian, notes that both President Joe Biden and Powell would welcome the declaration of an economic soft landing, but Powell is fully committed to waiting for a consensus on the data.
"I don't think Jay has wavered in what he wants to do, but I don't think he wanted to get almost ahead of himself," Spindel said, adding, "Certainly the window to offer policy accommodation before the election ... is closing fast."
Trump's ongoing pressure campaign
The Fed will announce its latest interest rate decision at 2 pm ET and is still widely expected to keep its rates at a 23-year high, meaning there will be no near-term relief from elevated borrowing costs. That means the issue will likely stay atop the political agenda.
Those high costs — especially for getting a mortgage — are why many in the political world are pushing for quicker action from the Fed to lower rates.
Housing is why Trump's questioner last week — ABC15 Arizona's Rachel Louise Just — brought up monetary policy during his stop in Phoenix. Trump focused on interest rates and energy prices, saying, "With me, they're coming down, interest rates are coming down, energy is coming down."
But Trump declined to be more specific on Powell even after repeated questions, saying he'd "do whatever is necessary to make America great again."
Trump has previously said, as in a 2020 news conference, that "I have the right to remove" Powell and has also signaled that he'd attack any move to lower rates before the election as a political move from Powell to help Biden.
But for now, Spindel says that Trump's attacks are unlikely to change Powell's behavior. The former president is already floating possible successors to Powell.
Pressure from the left which could grow
Influential Capitol Hill Democrats are also turning up the pressure with multiple new message to Powell.
The first came in a letter earlier this week from Democratic Sens. Warren, Jacky Rosen, and John Hickenlooper. A second letter came from Sen. Sheldon Whitehouse, the Budget Committee chair, and Rep. Brendan Boyle, the House's top Democrat on the issue.
Wednesday morning's statement from Sen. Heinrich continued the pressure campaign from the left with all messages focused heavily on the costs of housing as they made their case to Powell to lower rates.
"America is also currently facing a housing supply crisis," Whitehouse and Boyle wrote, continuing, "high interest rates exacerbate this supply crisis by increasing the costs to develop new housing while discouraging existing homeowners from upgrading to larger homes."
The case from Biden's allies — which has been echoed by a range of figures, including at least one former Trump economic adviser — is that high interest rates make the inflation problem worse when it comes to housing.
Indeed, Wednesday's new data continued to showed housing was as a key driver of higher core inflation readings.
The shelter index rose 5.4% on an unadjusted, annual basis, a slight slowdown from April. The index rose 0.4% month over month and was the largest factor in the monthly increase in core prices, according to the Bureau of Labor Statistics.
"It's becoming a vicious cycle where Chair Powell thumps the housing market and comes back again and says we need more data," charged Bilal Baydoun, the director of policy and research at the left-leaning Groundwork Collaborative.
Baydoun says Powell needs to change course but worries he won't because of politics and "a fear of being perceived as tipping the scales."
Biden has been more circumspect but also commented on the Fed in the context of housing. "I bet you that that little outfit that sets interest rates is going to come down," Biden said in a March speech while discussing mortgages.
It's a prediction he's repeated multiple times in the months since.
In his own statement Wednesday morning following the latest price data, the President cheered “welcome progress on lowering inflation” and did not mention monetary policy.
Powell's effort to stay out the political crossfire
Powell might be able to stay out of the fray of politics this week, but it could become a tougher job as the summer wears on.
Morningstar chief US market strategist David Sekera noted in a Yahoo Finance live interview this week that a rate cut on the eve of the election in September is still very much a possibility and that Powell would need to indicated that news to the markets at the July meeting.
Lachman predicts that Powell will let in as little politics as possible when he speaks to reporters this week.
"I think that he'll ignore it" and instead focus on the technical aspects of the Fed's work, he said. "He's pretty skillful at that."
But how Powell explains his position when the subject turns to the housing market will likely be closely scrutinized for months to come.
Baydoun says Powell "needs to explain" his approach to that issue. He adds housing is fundamental to how Americans see their future and "I'm fairly confident that the frustration over housing in particular will lead to more scrutiny."
By Ben Werschkul - Washington Correspondent
