By Dragging His Feet to Lower Interest Rates, Powell Hurt the Energy Transition

Federal Reserve Chair Jerome Powell on Wednesday announced that the Federal Open Market Committee is lowering the federal funds rate by 50 basis points, yielding an effective rate of 4.88%. Finally. The Fed should have provided interest rate relief months ago. While this overdue move is welcome, we must reiterate that Powell’s deferral of interest rate cuts has hurt the clean energy transition and inflicted other economic harms.

I wrote at length about this problem in January 2024:

It has become ever more apparent over time that rising interest rates are hampering efforts to decarbonize energy supplies and electrify transportation, housing, and other key sectors. High interest rates have had the dual effect of rolling back productive investment and lowering consumer demand, causing substantial drops in the stocks of major solar, wind, and other renewables-based companies; undermining the deployment of offshore wind projects; delaying the construction of electric vehicle (EV) factories; and slowing the installation of heat pumps.

In effect, Powell is exercising veto power over the Inflation Reduction Act and ruining “the economics of clean energy,” as David Dayen explained recently in The [American] Prospect. President Biden’s signature climate legislation contains hundreds of billions of dollars in subsidies for green industrialization, but repeated interest rate hikes have driven up financing costs enough to outweigh them. As Dayen noted, this is especially the case because the law’s reliance on tax credits requires upfront investment decisions.

Last month, Dominik Leusder explained why rate hikes have been particularly destructive for the green transition. Leusder drew attention to the capital-intensive nature of renewable power projects, which “tend to trade lower operating costs (the input into wind farms and solar plants is ‘free’) against higher (in relative terms) up-front costs.” As he noted:

By one estimate, 70% of the expenditure for an offshore wind farm derives from capital costs, compared to 20% with a gas turbine plant. This means that the vast majority of IRA-related projects require a lot of debt-financed spending up front. As the cost of the debt increases with higher interest rates, so does the levelized cost of energy (LCOE), a measure of the average cost of producing a unit of energy (kilowatt- or megawatt-hour) over the lifetime of the plant. And it does to a greater degree with renewables, the swift adoption of which is premised on them being cheap and profitable for investors.

As a result, a lot of the much-needed expansion in renewables capacity and storage—which is highly time-sensitive given the escalating effects of the climate crisis—is offset until borrowing costs adjust to the point where new projects become viable. What is more, while rates are high, the larger and better capitalized firms can gain a higher market share. Their deeper balance sheets also make it easier to accept higher borrowing costs now in the hope of refinancing these loans at lower rates later. The concentration of market power in the renewables sector would have all the usual implications for consumer welfare and innovation, the latter being seen as key to the energy transition.

His essay goes on to detail the devastating global impacts of the Fed’s monetary austerity, which hits developing countries especially hard, and is worth reading in full. At home, Powell’s maintenance of a higher-for-longer interest rate environment has also exacerbated the housing affordability crisis.

Ironically, raising the cost of borrowing did little to alleviate inflation (the stated reason for the rate hikes). This should come as no surprise. The cost-of-living crisis of 2021 to 2024 wasn’t the result of a wage-price spiral of the kind that neoliberal economists like Larry Summers and Jason Furman said can only be contained through demand destruction (i.e., engineering higher unemployment). Instead, as I wrote earlier this year:

[I]t was fueled by sellers’ inflation, or corporate profiteering, and exacerbated by the elimination of the pandemic-era welfare state. When the onset of Covid-19 and Russia’s invasion of Ukraine upended international supply chains—rendered fragile through decades of neoliberal globalization—corporations bolstered by preceding rounds of consolidation capitalized on both crises to justify price hikes that outpaced the increased costs of doing business. That safety-net measures enacted in the wake of the coronavirus crisis were allowed to expire only made the situation worse.

Given that the recent bout of inflation “is inseparable from preexisting patterns of market concentration, progressives have argued against job-threatening rate hikes… and for a more relevant mix of policies, including a windfall profits tax, stronger antitrust enforcement, and temporary price controls,” I pointed out. “Unlike the blunt instrument that Powell has been wielding ineffectively, those tailored solutions—the last two of which are within the Biden administration’s ambit—have the potential to dilute the power of price-gouging corporations without hurting workers.”

It’s noteworthy that during Powell’s August 2024 speech at the annual gathering of central bankers in Jackson Hole—where he signaled Wednesday’s pivot on monetary policy—the Fed chair excluded any mention of how the consolidation of corporate power contributed to rising prices in his explanation of the latest inflationary period.

This is significant because the Fed’s traditional inflation-fighting tool (i.e., raising interest rates to increase unemployment until demand and prices decrease) is ill-suited to confront our worsening polycrisis. It couldn’t effectively combat the supply shocks and corporate profiteering underlying the 2021-2024 cost-of-living crisis (disinflation occurred without mass joblessness despite Powell’s actions, not because of them). It also cannot solve cost-of-living struggles stemming from the fossil fuel-driven climate crisis.

The Roosevelt Institute’s Kristina Karlsson and Lauren Melodia showed in a 2022 paper that besides warming the planet, fossil fuel-based energy systems are inherently price volatile and a significant driver of inflation. The upshot is that shifting from coal, oil, and gas to renewables can permanently lessen inflationary pressures. Dovish monetary policy can help propel investment in wind, solar, and other green power sources.