With Latest Rate Hike, Progressive Critics Say Fed 'Making a Big Mistake'

The U.S. Federal Reserve is on the verge of causing a disastrous surge in unemployment, progressives said Wednesday after the nation's central bank raised interest rates for the second consecutive month--doubling down on its dogmatic quest to reduce prices even as slowing wage growth offers more evidence that inflation is being driven by corporate profiteering and supply chain issues rather than excess demand.

"Our country's lowest-paid, most vulnerable workers have endured too much already to be sacrificed in pursuit of severe rate hikes."

"Rate hikes will force millions of Americans into joblessness and make families poorer," University of California, Berkeley public policy professor Robert Reich wrote on social media after the Fed once again increased its benchmark policy rate by 75 basis points. "It's the last thing we need right now."

"Every time over the last half-century the Fed has raised interest rates this much and this quickly, it has caused a recession," Reich continued.

The string of rate hikes that began in March and has intensified this summer represents the central bank's most forceful cycle of monetary tightening since 1981, when then-Fed Chair Paul Volker imposed an unprecedented regime of financial austerity that is now widely seen as a key turning point in the ruling class-led assault on working-class living standards.

"Working people are already struggling," added Reich, who served as labor secretary under former President Bill Clinton. "The Fed is making a big mistake."

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Rep. Pramila Jayapal (D-Wash.), chair of the Congressional Progressive Caucus, also responded with concern to the Fed's latest rate hike.

"With the Federal Reserve's pace of monetary tightening now the fastest in decades, I have serious concerns that President [Joe] Biden's promise to 'grow the economy from the bottom up and the middle out' is now at risk," Jayapal said in a statement. "We are all concerned about the impact of inflation and rising costs, but today's decision to raise interest rates will do nothing to address their primary causes."

Jayapal noted that Fed Chair Jerome Powell has admitted that soaring energy and food prices "are in fact related to the pandemic, supply chain disruptions, and the war in Ukraine--that supply constraints, not excess demand, are responsible for persistent inflation."

"By hiking interest rates to deliberately slow the economy, the Fed could cause hardship to millions of Americans by unnecessarily increasing joblessness, while failing to significantly reduce the price of essential goods and services," said Jayapal. "These rate hikes also threaten to deter companies from making the investments needed to expand the economy's productive capacity."

Polling released earlier this month showed that a majority of U.S. voters are opposed to precipitating a recession to tame inflation.

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"At a time when the Biden administration has been working to reach full employment--creating nearly 9 million jobs and decreasing unemployment to among its lowest levels in 50 years--raising interest rates risks reversing that trend," Jayapal continued, "and could force employers to lay off employees who just got back to work, or slow hiring altogether."

"Just as the burden of high costs is not borne equally, so is the impact of interest rate hikes," she added. "Full employment allows for much-needed income gains, particularly within the bottom spectrum of wage earners--and during high unemployment, disadvantaged, lower-paid, and Black and Latino workers are disproportionately harmed."

"A lost paycheck or even lost hours would far exceed the extra monthly costs due to inflation."

Jayapal urged the Fed to "exercise the utmost caution going forward and resist the urge to further raise interest rates. With wage growth declining in recent months, our country's lowest-paid, most vulnerable workers have endured too much already to be sacrificed in pursuit of severe rate hikes that have far too often triggered recessions."

Claudia Sahm, a former Federal Reserve and White House economist in the Obama administration, argued Wednesday in a Financial Times opinion piece that the notion that "the U.S. needs a recession to bring inflation down... hinges on a simplistic model of the economy and a refusal to see Covid and the war in Ukraine as important sources of inflation now. The stakes are too high to rely on such a questionable approach."

"A recession is worse than inflation," wrote Sahm. "A lost paycheck or even lost hours would far exceed the extra monthly costs due to inflation."

Moreover, "there is no increase in the unemployment rate that would produce microchips for new cars, end China's lockdowns, defeat [Russian President] Vladimir Putin, drill oil, and build apartments," she continued. "The Fed raises interest rates and lowers demand, cooling off the labor market. Whether it inadvertently causes a recession or not, higher interest rates would not fix the supply problems and would probably make some worse by discouraging investments."

"Congress should help ease inflation, too," Sahm wrote. "For example, it could pass legislation to keep health insurance premiums low, reduce tariffs, build affordable housing, and fund sustainable energy production. Only a handful of measures would bring down inflation quickly, but they would all pay off in the coming years and make the U.S. economy more resilient in the next crisis."

"We must aim to protect workers and their families and bring inflation down," she added. "These two goals need not be in tension, but it will take more than outdated rules of thumb and a misunderstanding of our economic challenges to do both. We need many things today; a recession is not one of them."

Jayapal and Sahm were both echoing arguments made earlier this week by Sen. Elizabeth Warren (D-Mass.), whose Wall Street Journal op-ed not only made the case for why the Fed's current approach is "largely ineffective against many of the underlying causes of this inflationary spike," but also implored her party, which narrowly controls Congress, "to help working families survive."

Much of the Democratic Party's domestic agenda remains stalled thanks to ongoing obstruction from Senate Republicans and right-wing Democratic Sen. Joe Manchin (W.Va.), who has repeatedly cited inflation to justify his opposition to new, filibuster-proof spending designed to improve the public good.

As Warren argued Sunday, however, many of the progressive policies that Manchin is blocking would help bring down the sky-high costs hurting working households.

"Investing in high-quality, affordable child care would lower costs by bringing more than a million parents into the workforce," she wrote. "Ending tax breaks for offshoring and investing in American manufacturing would create good jobs and strengthen supply chains. Allowing Medicare to negotiate prices for prescription drugs would lower healthcare costs. And giving the Biden administration more tools to bolster competition policy would help crack down on price gouging by large corporations."