Federal Reserve Squeezes Economy Amid Increasing Criticism

With inflation an increasing challenge, it's more likely that the central bank will have to cause a recession to stop it, said Fed Chair Jerome Powell.

The Federal Reserve hiked interest rates again Wednesday even as criticism mounts that rate hikes could hurt workers too much.

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

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

“A chorus of economic experts have warned [that] hiking interest rates again is a recipe for millions of Americans receiving pink slips, yet the Fed has decided to triple down on what is not working,” said Liz Zelnick, a spokeswoman for the liberal group Accountable.US.

Claudia Sahm, a former Fed economist, said that more rate hikes will eventually “push financial markets to a breaking point.”

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

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

“The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers,” he said.

Earlier in the day, the central bank announced that it had once again hiked interest rates by three-quarters of a percentage point, continuing the highest pace of rate increases in decades in order to bring down the worst inflation in decades.

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

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

The current bout of inflation also stems partly from simple profiteering, as companies take advantage of consumers’ continued willingness to pay higher prices. Fed Vice Chair Lael Brainard noted in a speech last month that it would “meaningfully help reduce inflationary pressures” if corporations could accept slightly smaller profit margins. Powell didn’t take any questions about corporate profits on Wednesday.

Despite the growing criticism of the Fed, there’s a bipartisan consensus that the central bank’s strategy is sound. And the Fed has no shortage of high-profile supporters, such as Harvard University economist Larry Summers, who on Wednesday likened stopping the rate hikes to prematurely stopping a course of antibiotics.

Powell said Wednesday that it’s better for the Fed to hurt the economy too much, and then to try to heal it later, than to relent in its campaign against inflation. And he said that economic data have signaled that the economy needs more pain than previously thought. Job openings fell dramatically in August from near-record highs, for instance, but then rose again in September, according to the latest data this week.

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

Powell acknowledged that the odds of avoiding a recession — a so-called “soft landing” — have gone down.

“The inflation picture has become more and more challenging over the course of this year without question,” he said. “That means that we have to have policy be more restrictive, and that narrows the path to a soft landing.”

Popular in the Community


What's Hot