Federal Reserve Squeezes Economy Amid Increasing Criticism

The Federal Reserve raised interest rates again on Wednesday, despite growing criticism that the hike could hurt workers too much.

The Fed’s strategy has drawn more criticism in recent weeks from economists, Democrats and labor advocates who say higher interest rates could end up punishing workers without fixing inflation.

“Raising interest rates signals to working people that the government thinks we have too much money and should have less money to spend,” AFL-CIO President Liz Shuler said Wednesday.

“The assembly of economic experts warned [that] raising interest rates again is a recipe for millions of Americans getting pink slips, but the Fed has decided to triple down on what isn’t working,” said Liz Zelnick, spokeswoman for the liberal group Accountable.US.

Claudia Sahm, a former Fed economist, said additional rate hikes would eventually “push financial markets to a tipping point.”

Earlier this week, a dozen Democrats wrote in a letter to Federal Reserve Chairman Jerome Powell that they are “deeply concerned that your rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to hurt families.”

Also Read :  Alaska’s overall economic performance among the worst in US for several years, research finds

At a press conference on Wednesday, Powell suggested he would be willing to slow the economy to a crawl if that’s what it takes to control inflation. And he suggested that workers have excessive bargaining power because there are too many jobs.

“The labor market is still out of balance, and the demand significantly exceeds the supply of available workers,” he said.

Earlier that day tThe central bank said it raised interest rates once again by three-quarters of a percentage point, continuing the fastest pace of rate hikes in decades to tame the worst inflation in decades.

Higher interest rates make money more expensive to borrow, causing people to spend less, which ideally forces corporations to offer lower prices. But the entire economy is slowing down as part of the process.

Everyone agrees that price increases are the result of a mismatch between supply and demand. However, the Fed’s strategy is controversial because the mismatch is partly caused by supply problems that Powell acknowledged cannot be fixed by interest rates.

Also Read :  Millennial's beauty startup Social Bella raised over $225 million

The current wave of inflation also stems in part from simple profiteering, as companies take advantage of consumers’ continued willingness to pay higher prices. Fed Vice Chairman Lael Brainard noted in a speech last month that it would “significantly help reduce inflationary pressures” if corporations could accept slightly lower profit margins. Powell did not respond to questions about corporate earnings on Wednesday.

Despite growing criticism of the Fed, there is a bipartisan consensus that the central bank’s strategy is sound. And the Fed has no shortage of prominent supporters, such as Harvard University economist Larry Summers, who on Wednesday compared the halt in interest rate hikes to premature discontinuation of antibiotic therapy.

Powell said on Wednesday that it is better for the Fed to hurt the economy too much and then try to cure it later, than to ease up on its anti-inflation campaign. And he said economic data signaled the economy needed more pain than previously thought. Job openings fell dramatically in August from near-record highs, for example, but then rebounded in September, according to the latest data this week.

Also Read :  How China's zero-COVID policy threatens the US economy

“Incoming data since our last meeting suggests that the final level of interest rates will be higher than previously expected,” Powell said.

Powell acknowledged that the prospect of avoiding a recession – a so-called “soft landing” – had declined.

“The inflation picture has undoubtedly become more challenging this year,” he said. “This means that the policy has to be more restrictive, and that narrows the way to a soft landing.”

“The inflation picture has undoubtedly become more challenging this year,” he said. “This means that the policy has to be more restrictive, and that narrows the way to a soft landing.”


Leave a Reply

Your email address will not be published.

Related Articles

Back to top button