Federal Reserve Squeezes Economy Amid Increasing Criticism

The Federal Reserve raised interest rates again on Wednesday even as criticism grew 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 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.

“A corps of economic experts has warned [that] Raising interest rates again is a recipe for millions of Americans getting pink slips, but the Fed has decided three times over on things that aren’t working,” said Liz Zelnick, spokeswoman for the liberal group Accountable.US.

Claudia Sahm, a former Fed economist, said more rate hikes will “stimulate financial markets.”

Earlier this week, a dozen Democrats wrote in a letter to Federal Reserve Chairman Jerome Powell that they are “deeply concerned that your interest rate hikes risk sending the economy into a tailspin and failing to slow rising prices that continues to harm families.”

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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 job openings.

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

Earlier in the day, tthe central bank announced it had raised interest rates again by three-quarters of a percentage point, continuing the fastest pace of rate hikes in years in a bid to reduce the worst inflation in years.

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

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

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The current bout of inflation also stems in part from simple profitability, eg companies benefit from consumers’ continued willingness to pay higher prices. Fed Vice Chairman Lael Brainard noted in a speech last month that “it would go a long way toward reducing inflationary pressure” if corporations could accept slightly smaller profit margins. Powell did not take any questions about corporate profits 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 high-profile supporters, such as Harvard University economist Larry Summers, who on Wednesday compared the rate hike to a halt. too soon to stop a course of antibiotics.

Powell said on Wednesday that it is better for the Fed to hurt the economy too much, and then try to fix it later, than to give up its campaign against inflation. And he said economic data indicated the economy needs more pain than previously thought. Job openings fell sharply in August due to record levels, for example, but rose again in September, according to the latest data this week.

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“The data coming in from our last meeting indicated that the final level of interest rates will be higher than expected,” Powell said.

Powell admitted that the chances of avoiding a recession – a so-called “soft landing” – have diminished.

“The inflation picture is becoming more challenging this year without question,” he said. “That means we have to have a more restrictive policy, which narrows the path to a soft landing.”

“The inflation picture is becoming more challenging this year without question,” he said. “That means we have to have a more restrictive policy, which narrows the path to a soft landing.”


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