“It’s a return to the bad old days,” said Benjamin Dulchin, head of the Fed Up Campaign, a coalition of community groups and labor unions. “To overreact and stick it to busy people because it’s the only thing they know they can do is the same old bias.”
Fed Up was among the progressive groups that praised Republican Powell when he said in 2020 that the Fed would focus more on workers by delaying raising interest rates as long as possible — defying decades of central bank policy by adopting a new, worker-centered framework amid civil unrest after the murder of George Floyd.
But Powell — who will speak about the state of the labor market at a Brookings Institution event on Nov. 30 — is now grappling with persistent and raging inflation, a post-pandemic trend the Fed did not foresee. This has prompted policymakers to return to their traditional focus on fighting inflation by raising borrowing costs even if this leads to rising unemployment and triggering a recession.
The criticism is the first sign of a decline in political support for Powell, who cruised to confirmation for a second term in May with 80 votes in the Senate. While he still enjoys White House support and bipartisan respect, his pursuit of slow hiring is likely to draw new criticism from the new Congress in the form of bills, oversight hearings and angry letters.
Powell’s critics say much of inflation is driven by factors beyond the Fed’s control, such as supply chain problems, and point to signs that inflation is already starting to cool, as confirmed by the latest Consumer Price Index report. Progressives like Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) also blames corporations for taking advantage of the situation and driving up prices excessively.
Warren recently led 10 other lawmakers in calling the Fed’s rate hikes “alarming” and demanding further explanation for them. Other Democrats like Brown, the Ohio Democrat who oversees the Fed as chairman of the Senate Banking Committee, and Sen. John Hickenlooper from Colorado also got involved.
Powell is not giving up. While he and other Fed policymakers have signaled that future increases in borrowing costs will be more gradual as they gauge the impact on the economy, they also say rates still need to rise.
Senior central bank policymakers say they are open to signs that inflation can ease without a major hit to employment; for example, a key measure of employer benefit costs, to which the Fed gives particular weight, shows that private sector wages are slowing. But they are not convinced yet. Powell stressed at his press conference in early November that he still thinks the labor market is “out of balance.”
For now, the market is still so robust that the demand for workers far exceeds the number of people who can fill the positions. Powell says he will have to tone down — which could mean anything from less job creation to massive layoffs — a message echoed by other Fed officials last week. More broadly, he argues that while job loss is painful for many families, inflation hurts everyone, especially people on lower incomes.
“I don’t think the Fed’s goal is to have a weaker labor market; his goal is to have lower inflation,” said Jason Furman, a Harvard professor who served as President Barack Obama’s chief economist. “They say, if unemployment starts to rise, we’re going to stick with it.”
Traditional economic models suggest that lower unemployment and faster wage growth are linked to inflation, a framework that led former Treasury Secretary Larry Summers to suggest that the unemployment rate would need to rise to 6 percent, from 3.7 percent in October, to tackled inflation correctly.
For their part, Fed officials said in September that they expect their rates to push unemployment to 4.4 percent by next year — which could lead to more than a million job losses. But they do not target a certain level of employment.
“We’re never going to say there are too many people working, but the real point is this: inflation — what we hear from people when we meet with them is that they’re really suffering from inflation,” Powell told reporters at the time. “And if we want to set ourselves up, really light the way into another period of a very strong labor market, we have to get inflation behind us. I wish there was a painless way to do it. There is not.”
Therein lies the dilemma: what is the best way to reduce inflation, if not by hammering higher interest rates? The existing manual is not comprehensive.
Lindsay Owens, executive director of the progressive think tank Groundwork Collaborative, argued that opportunistic companies, not workers, should pay the cost of beating inflation through a tax on so-called excess profits.
“We’ve seen more and more examples of companies talking about the fact that they either see input costs going down or they see a future where their input costs are going down,” she said, citing corporate earnings calls to shareholders. “And then it turns to saying, ‘this is really good news, because we’re going to keep the prices the same,’ or in some cases, we say, ‘we’re going to do more price increases.'”
Skanda Amarnath, executive director of the labor advocacy group Employ America, said the Fed could also slow economic activity without aiming to increase unemployment. He said the purpose of aggressive government spending after the pandemic was to return the economy to pre-pandemic employment levels. Now that the labor market has largely recovered, “we don’t need as much growth right now to keep employment high.”
“It’s a middle ground,” he said. “Somehow they just said it doesn’t exist, which is wrong and problematic.”
But many economists say it’s an open question whether the labor market itself will have to be a victim in the fight against inflation, or whether it could just be collateral damage.
“Can inflation return to [Fed’s] A target of 2 percent, considering wage growth?” said Guy Berger, Chief Economist at LinkedIn. “Many mainstream economists and the Fed probably think no, because wage growth will by itself and by increasing costs put pressure on inflation.”
Furman said the problem is that the economy cannot produce enough to meet the demand for goods and services, and the result is inflation.
“Demand is still strong and that’s why workers are encouraged to ask for bigger raises, and that’s why companies are encouraged to ask for bigger price increases,” he said, which higher rates help to stifle. “This is the only way we know to get rid of inflation.”