Top Republican warns Fed risks being ‘behind the curve’ on inflation

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Fresh from a breakfast with Jay Powell, Pat Toomey sat down in his Washington office this week with mixed reviews of the chair of the Federal Reserve.

“Look, he’s a very capable guy,” the 59-year-old Republican senator from Pennsylvania said in an interview with the Financial Times. “He and I have a significant disagreement about the extent of the accommodation and how long it’s gone on. But I do have a lot of respect for him personally.”

Toomey has emerged as a leading congressional critic of the Biden administration’s hefty fiscal response and the Fed’s ultra-easy monetary policy, defying the prevailing “go big” mantra in Washington.

Toomey declined to say whether he would support Powell for a second term starting next year if Joe Biden, US president, decides to extend the Fed chair’s tenure. But he was vocal about where he thinks the Fed is making mistakes.

The central bank is in danger of being “behind the curve” on inflation, and the Fed’s insistence that the current surge in consumer prices will be temporary “requires you to wait to see if it goes away”, Toomey said. “It all just increases the risk that they end up having to take more severe action.”

Toomey senses that a hawkish shift may already be under way, however, after Fed officials signalled that they expect rate increases to start in 2023, and launched a debate on reducing or “tapering” the central bank’s asset purchases.

“The reality is the tapering is going to begin. And I’d be shocked if it doesn’t begin by early next year, maybe even sooner. And I think markets expect that, and the markets can absorb that,” he added.

Toomey has been in the US Senate since 2011, after previously leading the Club for Growth, a conservative anti-tax group, and serving in the House of Representatives.

During the interview he warned Republicans that if they choose primary candidates aligned with former president Donald Trump they risk scuppering their chances of winning control of Congress in the 2022 midterm elections.

But he believes that his party should otherwise have a strong case against the Democrats next year, even though the economy is recovering and national polls show that many of Biden’s measures, including the stimulus cheques, remain popular.

“Every stop I make in Pennsylvania. I hear people sort of really worried that, ‘how can we be spending money at this rate — It’s like somebody in Washington thinks this is Monopoly money, but it’s not,” he said.

Before he entered politics, Toomey was a derivatives trader, and he is now the top Republican on the Senate banking committee and a member of the Senate finance committee. Together, the two panels oversee the Fed, the Treasury, the SEC and USTR, with primary roles in crafting tax, spending and financial legislation.

Toomey was speaking on the eve of Biden’s deal with a group of centrist senators from both parties to plough an extra $1tn of federal funds into infrastructure spending over the next eight years.

Toomey said he expected the agreement to pass, but was still unsure about the details. He was satisfied that it included no tax increases, and was limited to physical infrastructure, two key Republican demands.

But it was not clear that it was paid for in a credible manner, he said. The funding mechanisms include better tax enforcement, unused stimulus money, as well as sales of mobile phone spectrum and strategic petroleum reserves.

After the agreement was reached on Thursday, he tweeted: “A framework is not legislation, and the actual text matters. I look forward to reviewing this more in the coming weeks”.

One of Toomey’s biggest, but quixotic, cross-party efforts has been to strike a bipartisan deal on gun reform. He first teamed up with Democrat Joe Manchin on a proposal to require background checks for all private gun sales in 2013, in the wake of the Sandy Hook massacre. Today, he concedes the “odds are not good” for the bill to become law.

“I have not had a lot of success, persuading my Republican colleagues to do something about it,” he said, adding that the recent turmoil and financial collapse at the National Rifle Association, the main lobby group for gun owners, would do little to change the dynamic.

“If the NRA went away tomorrow, there would be a replacement,” he said. “[It] would emerge because there are a lot of people out there who feel very strongly about their Second Amendment rights.”

On the banking committee, Toomey has attacked what he described as the “mission creep” of agencies such as the Fed and the SEC into climate policy and other “ESG” goals.

And he decries the rise of “stakeholder capitalism” as the biggest strain on relations between Republicans and business.

“To the extent that business weighs into the culture wars, so to speak, that creates tension,” Toomey said. “I think that’s a bigger issue for a lot of Republicans now than the whole Trump episode.”

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