Nothing, except a Fed-induced recession.
In recent weeks, many of the Federal Reserve bigwigs have made it clear that the US central bank will continue with its controversial strategy of raising interest rates to tame inflation, to hell with the risks of an economic crisis.
“I can assure you that my colleagues and I are strongly committed to this project and will continue it until the work is done,” Fed President Jerome Powell told the libertarian think tank at the Cato Institute on Thursday. “Based on what I know today, I support a significant increase at our next meeting. . . to bring the policy rate to a setting that is clearly limiting demand, “said Christopher Waller, one of the Federal Reserve Board governors last Friday. A few days earlier, Fed Vice President Lael Brainard said at a meeting of the financial sector that “monetary policy will have to be tight for some time” and that “we are in this for as long as it takes to bring down inflation. ”
The point is clear: keep your hat, because the Federal Reserve will continue to tighten monetary policy for the foreseeable future, making loans more expensive to reduce job vacancies and give workers less power to bargain or quit and look for better working conditions.
Of course, the Fed’s governors say they can do this without causing a recession, even though that’s exactly what has happened nine of the last twelve times they have tightened monetary policy since 1950. While calling for a “significant hike” in interest rates Waller said that “fears of a recession” are “gone” and that “the robust US labor market is giving us the flexibility to be aggressive.” Powell himself stated at the outset that although he would have been “challenging enough”, the “strong shape” of the US economy meant that a “soft landing” was possible with this strategy.
Yet the Fed does not seem to believe its arguments. Late last month, Powell acknowledged that his strategy “would bring some suffering to households and businesses.” Since then, analysts have read some of his more recent comments – that tackling inflation means “a sustained period of below-trend growth” and “softening labor market conditions”, also known as higher unemployment – which it is no longer aiming for that “soft landing”, but rather a “growing recession”, in which the economy continues to grow, but at an insignificant amount, and with increasing loss of jobs.
More significantly, like the of Interception Ken Klippenstein found yesterday that the Federal Reserve itself published a little-noticed study in July that questions the words of its own leadership. The research examined the effect of the Fed’s tightening of monetary policy after the end of World War I, when the country was similarly experiencing a period of inflation, and the Fed embarked on an identical strategy to address it: raise rates. to undermine a strong labor market and thereby crack down on consumer demand (since putting people out of work and removing the leverage to bargain better wages tends to lead to people spending less money).
“As monetary policy tightened, the demand for labor fell rapidly and the economy entered a deep recession,” warns the newspaper. “Our findings show that labor demand has reacted sharply and rapidly to tightening monetary policy, at a rate that may exceed the ability of policymakers to monitor current economic conditions.”
In other words, thinking they could safely manage the economy and bring it into balance by raising interest rates, things quickly and unpredictably got out of the hands of the Fed – and the result was a severe economic downturn. Despite this, a hundred years later and in very similar economic conditions, the Fed is now trying the same thing again, certain that this time will be able to safely manage the economy and bring it back into balance.
It is worth mentioning at this point that Powell has already publicly admitted that this approach will do nothing on the main drivers of inflation, namely energy and food prices, which are affected by related supply chain shocks. to the pandemic and from Russia’s war on Ukraine. Nor will it do anything for another important driver: corporate profit.
While some irresponsible voices have labeled the notion that corporate price scam plays a role in inflation a “conspiracy theory,” it is becoming increasingly difficult to dismiss. In both profit claims and financial records, corporate executives have openly admitted that they have used these global crises to mask undue price increases that have earned them greater profits. It’s hard to argue that price hikes are simply a matter of companies passing higher costs on to consumers when the U.S. Department of Commerce found that U.S. companies had their best year of profits. since 1950 last year.
Brainard itself also said that “the reduction in markups could also make an important contribution to reducing price pressures” and that profit margins were particularly high relative to the costs of motor vehicles and retail. “Overall retail margins – the difference between the price retailers charge for a good and the price retailers pay for that good – have increased significantly more than the average hourly wage retailers pay workers to restock. the shelves and serving customers over the past year, “he said.
The vice president of the Fed, in other words, contradicted the Fed president on one of the central ideas driving the risky strategy of the central bank: that what is causing the inflation is that workers are paid too generously, causing the price to rise. of the goods and services they produce. However, they will carry on with their inflation strategy, undaunted.
Democrats should do all they can to put an end to this, if not for the hardships that ordinary Americans already struggling in this economy will encounter, at least to save their own political skin. Falling into a recession just before a series of crucial elections usually doesn’t bode well for the ruling party, and even if the midterms pass before the economy goes through a major crisis, they still have a presidential election to think about in between. two years – probably even earlier, as the notoriously long US presidential election cycle begins roughly more than a year before any actual vote.
The Fed’s plans have already received a strong push back from Senator Elizabeth Warren (D-MA), but she has been a relatively lonely voice in this fight. At the very least, elected socialists and progressives like Senator Bernie Sanders (I-VT) and team members should join her to form a chorus of public criticism of this approach. But the most effective would be public and private pressure from the president himself.
Critics will say that Joe Biden overstepped his limits by pushing against Federal Reserve independence. In reality, this independence is exaggerated to the point of unreality. Presidents have long tried to pressure the Fed to do what they wanted with monetary policy, perhaps most successfully when Richard Nixon convinced the Fed chairman to ease monetary policy before the 1972 election he ended up winning.
Even if he and the rest of the party rallied the public against the Fed’s plans, Biden would undoubtedly be furious for violating beloved “norms” of the establishment. But that’s nothing compared to the slaughter it will suffer if millions of Americans not only have continued inflation to deal with, but also increased job losses.
The Fed planning a recession once again is a political choice. But so is watching and letting them do it unchallenged.