Federal Reserve Squeezes Economy Amid Increasing Criticism

The Federal Reserve raised interest rates again Wednesday even as criticism mounted 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 end up punishing 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 chorus of economic experts warned [that] “Raising interest rates again is a recipe for millions of Americans getting pink slips, but the Fed decided to triple down on what’s not working,” said Liz Zelnick, a spokeswoman for the liberal group Accountable.US.

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

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

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

“The labor market continues to be unbalanced, with demand far outstripping the supply of available workers,” he said.

Early in the day, tThe central bank announced that it has once again raised 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 it more expensive to borrow money, which causes people to spend less, which ideally forces corporations to offer lower prices. But the economy as a whole slows down as part of the process.

Everyone agrees that price increases come from a mismatch in supply and demand. The Fed’s strategy is controversial, however, because the disagreement was caused in part by the supply problem that Powell acknowledged cannot be fixed by interest rates.

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The current end of inflation also stems in part from simple profiteering, as companies take advantage of consumers’ continued willingness to pay higher prices. Fed Vice President Lael Brainard noted in a speech last month that it would “significantly help reduce inflationary pressures” 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 suspension of rate hikes with prematurely stop a course of antibiotics.

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

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

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

“The inflation picture has become more and more challenging during this year without question,” he said. “This means that we have to have more restrictive policies, and that reduces the path to a soft landing.”

“The inflation picture has become more and more challenging during this year without question,” he said. “This means that we have to have more restrictive policies, and that reduces the path to a soft landing.”

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