[ Federal Reserve chairman Jerome Powell plans to address sky-high
inflation by hiking interest rates — acknowledging that doing so
will suppress wages and worker power. Its a response that will force
workers to bear the brunt of the inflation crisis.]
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TO FIGHT INFLATION, THE FED IS DECLARING A WAR ON WORKERS  
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Julia Rock
June 13, 2022
Jacobin
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_ Federal Reserve chairman Jerome Powell plans to address sky-high
inflation by hiking interest rates — acknowledging that doing so
will suppress wages and worker power. It's a response that will force
workers to bear the brunt of the inflation crisis. _

Jerome Powell, chairman of the US Federal Reserve, speaks during a
news conference in Washington, DC, May 4, 2022. , (Al Drago /
Bloomberg via Getty Images)

 

New inflation data
[[link removed]] released Friday
offered dismal news: historic price increases aren’t showing any
signs of abating, and in fact may be accelerating
[[link removed]].

What can be done? Federal Reserve chairman Jerome Powell has an idea:
throw cold water on the hot labor market — perhaps the one bright
spot in the current economy.

In fact, Powell recently screamed the quiet part out loud, making
clear the largest central bank in the world is in fact an adversary to
workers, when he declared
[[link removed]] that
his goal is to “get wages down.”

At a May 4 press conference in which he announced a .5
percent interest rate hike
[[link removed].],
the largest since the year 2000, Powell said he thought higher
interest rates would limit business’ hiring demand and lead to
suppressed wages. As he put it, by reducing hiring demand, “that
would give us a chance to get inflation down, get wages down, and then
get inflation down without having to slow the economy and have a
recession and have unemployment rise materially.”

In other words, Powell is saying that the primary, blunt financial
instrument at his disposal to address sky-high inflation
[[link removed]] — hiking interest rates — will limit
job opportunities and suppress pay.

Increasing borrowing costs and discouraging investment would not do
much to address the root causes of today’s inflation
[[link removed]] —
brittle supply chains, a surge in energy prices further heightened by
Russia’s invasion of Ukraine, a housing crisis (which could
actually be exacerbated
[[link removed]] by
interest rate hikes), all of which are undergirded by corporate
[[link removed]] concentration
[[link removed]] enabling
exorbitant corporate profits.

Hiking rates would likely suppress wages and worker power, as Powell
indicated, a roundabout way to tackle inflation. That’s because
there is overwhelming evidence
[[link removed]] that
[[link removed]] worker
wages
[[link removed]] are
not driving inflation, especially since wage increases are failing to
keep up [[link removed]] with rising
prices. Friday’s data showed that while wages have continued to
increase, the rate of increase is slowing
[[link removed]].

 

Does the Fed chairman really mistakenly believe that wages are driving
inflation? If not, Powell — a mega-wealthy private equity mogul
[[link removed]] and
a Republican — might have just validated an argument long made by
progressives: that a key driver of the central bank’s interest rate
policies is actually to suppress labor power.

Meanwhile, if President Joe Biden and the Democrats who control
Congress continue to sit on their hands and fail to take real action
to address skyrocketing energy prices, the supply chain crisis, and
corporate greed, they will be accepting a response that will force
workers to bear the brunt of the crisis.

“If you endorse today’s rate hikes, and the further tightening it
implies, you are endorsing the reasoning behind it: labor markets are
too tight, wages are rising too quickly, workers have too many
options, and we need to shift bargaining power back toward the
bosses,” Josh Mason, an economist at the Roosevelt Institute and a
professor of economics at John Jay College, City University of New
York, wrote in a recent blog post
[[link removed]].

The Fed and Worker Power

The Fed, which is tasked with controlling the money supply and
regulating banks, was given a dual mandate by Congress in 1978 to
guide a monetary policy aimed at economic growth: achieving “full
employment” and “price stability.”

Powell and the six other officials who set this monetary policy do so
primarily by adjusting interest rates, or the cost of borrowing money.

Powell, who was first appointed to helm this operation by President
Donald Trump in 2017, was reappointed for a second term by Biden in
2021. “Chair Powell has provided steady leadership during an
unprecedently challenging period, including the biggest economic
downturn in modern history and attacks on the independence of the
Federal Reserve,” said Biden in a statement
[[link removed]] announcing
his nomination.

The statement added, “Powell and [his colleague Lael Brainard] share
the administration’s focus on ensuring that economic growth broadly
benefits all workers. That’s why they oversaw a landmark
reevaluation of the Federal Reserve’s objectives to refocus its
mission on the needs of workers of all backgrounds.”

Before Powell’s first term, the Fed had pursued a monetary policy
that limited worker power
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In the decades following the 1979 “Volcker shock” — in which
chairman Paul Volcker induced a recession in order to cut inflation,
creating a debt crisis in Latin America and crushing the labor
movement
[[link removed]] — the
bank consistently limited inflation below its 2 percent
benchmark, suppressing economic growth
[[link removed]].

“Tight to an Unhealthy Level”

When COVID hit, it seemed like the Fed was shifting away from its
anti-worker stance. The bank slashed interest rates and went on a
bond-buying spree
[[link removed]], in
addition to other measures.

While the Fed’s intervention in corporate bond markets may have
amounted to a bailout of corporate America
[[link removed]] — especially heavily
leveraged oil
[[link removed]] and
gas companies
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and lending programs prioritized large companies over municipalities
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actions early in the pandemic helped bring interest rates to zero
[[link removed]].

“In 2015, I was working as an economist at the Federal Reserve. If
someone told you then that in 2020 a deadly pandemic would shut down
life as we knew it and that in the midst of a stop-and-go response
from Congress, a Federal Reserve chair — who was a lifelong
Republican and a Wall Street executive appointed by President Donald
Trump — would emerge as a champion of Main Street, you may have
thought she was from another planet,” wrote
[[link removed]] economist
Claudia Sahm in a _New York Times_ opinion piece last year.

Today’s labor market is, by some metrics, better for workers than at
any point in recent history. Thanks to COVID-19 relief legislation
[[link removed]] —
namely the CARES Act and American Rescue Plan providing enhanced
unemployment benefits and stimulus checks — working people had the
flexibility to quit terrible jobs and take higher-paying ones.
Additionally, the labor force shrunk as parents stayed home to take
care of their children who couldn’t go to school or day care,
workers died of COVID or were debilitated by lingering COVID symptoms
[[link removed]],
and people feared returning to the workforce due to inadequate
pandemic protections.

This tight labor market has enabled historic gains for workers. Wage
inequality is at its lowest point
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forty years. In the restaurant and
[[link removed]] hospitality
[[link removed]] industries
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wages have increased by over 10 percent in the past two years. For
every unemployed worker, there are two job openings
[[link removed]].
As a result, employers have to compete for workers by
[[link removed](31%25)%20cited,factor%20in%20higher%20estimated%20pay.] offering
higher wages
[[link removed]] and better
benefits
[[link removed]].
That’s good for workers: over half of people who quit their jobs for
a new one receive a pay increase greater than 10 percent, according
to
[[link removed]] ZipRecruiter
survey data, and the average pay increase is 7.5 percent
[[link removed]].
A resurgent labor movement has massively benefited from the fact that
workers have less to fear from being fired, and can credibly argue
that winning a union could mean winning wage increases.

But now, the tide might be turning for workers — since statements by
Powell and other bank officials indicate that the Fed hasn’t
actually turned away from its anti-labor stance.

 

In March, Powell noted that the labor market may be too good for
workers. “Take a look at today’s labor market: What you have is
1.7 job openings for every unemployed person,” Powell told
reporters
[[link removed]] after
raising interest rates for the first time since 2018. “That’s a
very, very tight labor market. Tight to an unhealthy level, I would
say… If you were just moving down the number of job openings so that
they were more like one to one, you would have less upward pressure on
wages. You would have a lot less of a labor shortage.”

To weaken that labor market, Powell has turned to hiking interest
rates. After cutting interest rates to zero in March 2020, the bank
raised rates by .25 percent in March, by .5 percent in May
[[link removed].],
and is expected to
[[link removed]] raise
rates by .5 percent again in June.

The way interest rates impact wages is based on a number of contingent
factors, but the main theory is that raising the cost of borrowing
money discourages businesses from making investments, which leads them
to slow hiring or even lay off workers. If workers have fewer options
for jobs, they are more likely to accept lower wage work and less
likely to form unions.

Workers in the United States aren’t the only ones who will suffer
from Powell’s policy. Rate hikes by the Fed and other central banks
around the world are already contributing to debt crises
[[link removed]] in
developing countries, leaving more people to die of hunger in places
like Yemen
[[link removed]] and Sri
Lanka
[[link removed]].

Forging an Alternative Path

There’s no question that the federal government needs to deliver
some type of relief.

Inflation is outpacing wage growth
[[link removed]] for most workers, meaning
that “real wages” are actually declining. Not
everyone experiences the same level
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inflation, based on their expenses, but today’s price
increases appear to be hitting
[[link removed]] low-income
people
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hardest.

But federal lawmakers could forge an alternate path to combating
inflation. They could, for instance, make wealthy people pay the price
of inflation — such as by raising the corporate tax rate, which
Republicans slashed by 40 percent in 2017
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or instituting a capital gains tax
[[link removed]].

Of course, with corporatists like Senators Kyrsten Sinema (D-AZ) and
Joe Manchin (D-WV) running the show in a fifty-fifty Senate, those tax
policies don’t appear to be on the table.

Instead, the White House has continued to endorse the Fed’s
approach. “My plan is to address inflation. That starts with a
simple proposition: respect the Fed, respect the Fed’s independence,
which I have done and will continue to do,” Biden said
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a recent meeting with Powell.

After Friday’s inflation numbers were published, Brian Deese, the
director of Biden’s National Economic Council, said
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“What the numbers today underscore is what the president has been
saying and what we are focused on — which is fighting inflation has
got to be our top economic priority. The Fed has the tools that it
needs, and we are giving them the space that it needs to operate.”

Unfortunately, deferring to the Fed to address the crisis means
throwing low-wage workers out of their jobs — and decreasing
workers’ wages and power.

_Julia Rock is a reporter for the Lever._

* inflation
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* War on Workers
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* Jerome Powell
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* federal reserve
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* interest rates
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