The Fed continues to raise interest rates. Workers are hammered | Robert Reich
On Friday in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell said the Fed must continue to raise interest rateseven if it will “make households and businesses suffer”.
This – with all due respect – is crazy.
To be sure, inflation is near a four-decade high. But the Fed’s aggressive effort to tame it with big interest rate hikes – the fastest series of rate hikes since the early 1980s – increases the risk of recession. Powell’s remarks signal that the Fed will likely raise rates again in September by another three-quarters of a percent, further raising risk.
The pain is already being felt across the country. Wage gains have not kept up with inflation. This means that most Americans continue to lose economic ground.
Powell actually tells them that they will lose even more ground. Higher interest rates, he admits, will slow economic growth and result in “softer” labor market conditions – a euphemism for lower wage increases and fewer jobs. But “these are the unfortunate costs of reducing inflation.”
Meanwhile, however, corporate profits continue to soar. Profit margins highest since 1950, Commerce Department figures show published Thursday.
Stop for a moment and let your mind dwell on this: the prices companies charge their customers are exceed regardless of the increased costs businesses face for materials and labor.
In other words, wages do not drive up inflation. Production costs do not drive up inflation.
Businesses drive up inflation. The biggest single source of inflation in the United States is corporate pricing power.
So why is the Fed raising interest rates? ‘Cause that’s what the Fed Is when prices rise. It’s the only tool in the Fed’s toolbox. To quote the old adage, when all you have is a hammer, everything looks like a nail – or, in this case, an interest rate to rise.
The problem: it mainly forces workers and low-income people to fight inflation. They are the first to lose their wages and their jobs as the economy slows down. They are already being hammered.
If the Fed continues to raise rates to slow inflation, they will be hammered even further.
This could be justifiable if companies invested their windfall profits in more productive capacity – adding factories, materials, warehouses and jobs – which would expand their ability to meet future demand and thus better insure themselves against the downturn. ‘inflation.
But they are not. They are using their profits to buy back their stocks so that their stock values don’t sag too much after they have already faltered due to the Fed-induced slowdown.
At the start of the year, Goldman Sachs estimated that 2022 would see a record $1 billion in buybacks. This is unlikely to happen, but redemptions continue apace. In the second trimester, redemptions increased around 7% compared to the previous year.
Some economists say there is no reason to think companies would now wield more pricing power than they have had all along. Why would they wait for material and labor costs to rise before increasing their profit margins?
The answer is simple. Inflation gives them a hedge. They may say – as many do now – that they have no choice but to raise prices given rising material and labor costs. They just don’t advertise that their profits are growing at the same time.
Which brings us to the central political question: why can’t the onus of fighting inflation be placed where it belongs – on big business that continues to raise prices in search of margins? larger beneficiaries and higher stock prices?
The simple answer is that big business has so much political clout that they would never allow the kinds of policies that would have that effect – eg windfall tax, price controls, higher taxes on them themselves and the wealthy, and bolder and more effective antitrust enforcement.
Although Democrats passed a 1% tax on stock buybacks in the recently enacted Cut Inflation Act, they were unable to take these other measures. Even a Democratic president and Democrats in charge of both houses of Congress could not overcome corporate vested interests.
So it all hinges on Jerome Powell and the Fed. Which means it’s all about the workers.