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interest rates
By Dragging His Feet to Lower Interest Rates, Powell Hurt the Energy Transition
Rising interest rates were hampering efforts to decarbonize energy supplies and electrify transportation, housing, and other key sectors.
Sep 19, 2024
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.
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Fed Urged to Quickly Slash Rates as Powell Warns of 'Downside Risks to Employment'
"Let's be clear: The Fed has all the data it needs to cut rates now—and it's past time to deliver relief for the American people," said the Groundwork Collaborative.
Aug 23, 2024
Federal Reserve Chairman Jerome Powell admitted during a closely watched speech Friday that the central bank's decision to keep interest rates high for an extended period has increased the risk of a labor market downturn, which could threaten the jobs and livelihoods of millions of U.S. workers.
After holding the federal funds rate steady at 5.25% to 5.50% for more than a year—even as economists and lawmakers warned of the harmful impacts on working-class Americans, the housing market, and the broader U.S. economy—Powell conceded Friday that "the time has come for policy to adjust," a strong signal that the Fed will cut rates at its September meeting.
"The inflation and labor market data show an evolving situation," Powell said in his remarks in Jackson Hole, Wyoming, the site of what's been described as "the world's most exclusive economic get-together."
"The upside risks to inflation have diminished," the Fed chair continued. "And the downside risks to employment have increased."
"The direction of travel is clear," he added, "and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
The Fed's high interest rates are pushing people into debt and making life unaffordable for millions of families
Powell's remarks came two days after the U.S. Labor Department issued a significant downward revision of the nation's job growth estimates for 2023 and early 2024, heightening concerns that the Fed has waited too long to reduce interest rates. In the 12 months that ended in March 2024, the U.S. added around 818,000 fewer jobs than the Labor Department previously believed, according to the new figures.
"Let's be clear: The Fed has all the data it needs to cut rates now—and it's past time to deliver relief for the American people," the Groundwork Collaborative, a progressive think tank, said Friday in response to Powell's speech.
In a Thursday statement, Groundwork chief economist Rakeen Mabud called on the Fed to cut interest rates by "at least 75 basis points" at its meeting next month.
"The Fed's high interest rates are pushing people into debt and making life unaffordable for millions of families," said Mabud. "The biggest threat to the economy is not inflation, it's the Fed."
Bharat Ramamurti, senior adviser for economic strategy at the American Economic Liberties Project and former deputy director of the White House National Economic Council, also implored the Fed to "move quickly" on interest rate reductions "to avoid unnecessary harm to workers."
Inflation has fallen dramatically in the U.S. since it peaked at 9.1% in June 2022, but the Fed opted during its latest policy meeting last month to keep interest rates at a two-decade high for the 12th consecutive month.
The decision prompted the Revolving Door Project (RDP), a progressive watchdog group, to accuse Powell of succumbing to political pressure from Republican nominee Donald Trump and other Republicans who have warned the Fed chair to keep rates elevated until after the November elections.
Trump originally nominated Powell in 2017, and President Joe Biden decided to renominate the Fed chair for another four-year term despite progressive opposition.
Jeff Hauser, RDP's executive director, said earlier this week that "with the possible exception of Attorney General Merrick Garland, Federal Reserve Chair Jerome Powell is the worst appointee in President Joe Biden's administration."
"The sad irony is that Biden didn't have to renominate a Republican private equity executive to lead the Fed in 2022; in fact, we implored him not to," said Hauser. "Our concerns about Powell's ethical shortcomings, fickle commitment to full employment, and fealty to deregulation have, sadly, been borne out by his actions."
"Should she win the upcoming election," Hauser added, "Democratic presidential nominee Kamala Harris must heed the lessons of the Powell era and nominate a central bank leader without compromising ties to Wall Street who is dedicated to maximizing employment and strengthening financial regulation."
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Harris to Target Predatory Wall Street Landlords With Four-Year Housing Plan
The Democratic nominee is expected to endorse a crackdown on algorithmic price-setting by big landlords and an end to tax breaks for corporate investors that buy up single-family homes.
Aug 16, 2024
Democratic presidential nominee Kamala Harris on Friday is set to outline a four-year housing plan that would promote the construction of 3 million new housing units, provide substantial down-payment aid to first-time homebuyers, and strip away tax incentives for corporate investors that
purchase single-family homes and drive up prices to pad their bottom lines.
Harris'
proposals to tackle the nation's worsening housing crisis are part of a broader economic agenda that the vice president will lay out in a speech Friday afternoon in North Carolina.
Harris, who recently pledged to "take on corporate landlords and cap unfair rent increases," is expected to urge Congress to pass a pair of bills that would crack down on algorithmic price-setting by big landlords and bar corporate investors who buy up 50 or more single-family rental homes from taking advantage of tax breaks, building on President Joe Biden's push for corporate landlords to cap rent hikes.
A recent report by the Government Accountability Office (GAO) found that just 32 institutional investors owned a combined 450,000 single-family homes in the U.S. and the five largest investors owned nearly 300,000 homes. Institutional investors control 25% of the single-family rental housing market in Atlanta, Georgia, according to the GAO.
Another major component of Harris' housing plan calls for providing up to $25,000 in down-payment assistance to "working families who have paid their rent on time for two years and are buying their first home."
Harris' campaign said the plan would "expand the reach of down-payment assistance, allowing over 4 million first-time buyers over four years to get significant down-payment assistance."
"Trump likes to talk about being a builder, but when he was president, he simply never got it done. Now, his Project 2025 agenda will make it more expensive to rent or buy a home," the Harris campaign said Thursday. "Year after year during his presidency, Trump tried to gut rental assistance programs. New home construction slowed while Trump was in office—tightening the housing crunch and enabling his wealthy friends to profit."
Housing justice advocates applauded the emerging details of Harris' plan, arguing that persistent tenant organizing has helped elevate the hardships of renters to the top of the Democratic Party's priority list for 2024 and beyond.
"How did these get on the agenda? Organized renters making good trouble," the Alliance for Housing Justice wrote on social media.
In recent months, progressives and tenant organizers have worked to make housing central to the 2024 campaign as renters across the U.S. struggle to make their monthly payments and as sky-high prices, elevated interest rates, and supply shortages box out first-time homebuyers. Housing costs accounted for roughly 90% of the overall increase in the Consumer Price Index last month, according to the Bureau of Labor Statistics.
A recent research brief by Russell Weaver of Cornell University stressed that tenants impacted by the nation's housing affordability crisis are a "large, untapped political base—especially for Democrats and progressives."
"Candidates who campaign on housing affordability and tenant protections have the potential to significantly boost renter turnout, which could be decisive in tightly contested races," Weaver said.
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