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jerome powell
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 'Waited Too Long' But Finally Cut Interest Rates
"The Fed must continue to cut rates aggressively in the coming months to prevent a slowing labor market and provide much-needed relief to people who are bearing the brunt of high interest rates," said one economist.
Sep 18, 2024
Economists and working-class people across the United States on Wednesday welcomed the Federal Reserve's decision to cut its benchmark interest rate by half a percentage point as an incredibly overdue and necessary move.
In line with signals from Fed Chair Jerome Powell's speech last month, the Federal Open Market Committee lowered the federal funds rate by half a percentage point to 4.74-5%, the first cut "since March 2020 when Covid-19 was hammering the economy," as The Associated Pressnoted. Additional cuts are expected over the next two years.
"Finally," wrote Kenny Stancil, a senior researcher at the Revolving Door Project and former Common Dreams staff writer, in a blog post. "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."
Lawmakers and experts, including Groundwork Collaborative chief economist Rakeen Mabud, have long called for rate cuts and highlighted the harms of refusing to pursue them.
"Today's rate cut is a step in the right direction, but only a first step," said Mabud in a statement Wednesday. "The Fed must continue to cut rates aggressively in the coming months to prevent a slowing labor market and provide much-needed relief to people who are bearing the brunt of high interest rates."
Center for Economic and Policy Research senior economist Dean Baker also welcomed that the Fed is changing course, saying: "This is a belated recognition that the battle against inflation has been won. Contrary to the predictions of almost all economists, including those at the Fed, this victory was won without a major uptick in unemployment."
"Unfortunately, the Fed waited too long to make this turn," Baker continued. "As a result, the unemployment rate has drifted higher. While there is little basis for concerns about a recession, if the unemployment rate is 0.5 percentage points higher than it needs to be, that translates into 800,000 people out of work who want jobs."
"It is good that the Fed has now recognized the weakening of the labor market and responded with an aggressive cut," he added. "Given there is almost no risk of rekindling inflation, the greater boost to the labor market is largely costless. Also, it will help to spur the housing market where millions of people have put off selling homes because of high mortgage rates."
Liz Zelnick of Accountable.US similarly stressed the benefits, saying that "while it should have come sooner, the Fed's interest rate cut will ease some burden for many Americans that found it simply too expensive to buy new homes or cars."
"Fortunately, the Fed's aggressive interest rate strategy defied odds and did not spur a recession as the economy continues to grow hundreds of thousands of jobs every month while wages are rising," she said. "Persistently high interest rates were never going to get at the root of the corporate price gouging epidemic that has needlessly kept prices high on many necessities—a problem that is on Congress to fix."
Some members of Congress who have been pushing for rate cuts also applauded the belated action—including Sen. Martin Heinrich (D-N.M.), chair of the Joint Economic Committee.
"Let's be clear: Today's decision is a big win for families across the country," he declared. "Lower rates mean that more families will be able to buy a home or a car without high interest payments looming over them, and their credit card bills will go down."
"But there is still work to be done," he said. "I will continue to work with my colleagues to fight for policies that raise wages, strengthen our economy, create new jobs, and lower prices for families in New Mexico and across the country."
Congressman Brendan Boyle (D-Pa.), ranking member of the House Budget Committee, has also criticized the central bank's refusal to cut rates and praised the Wednesday reversal.
"We've made significant progress on inflation, but House Democrats know there is more to be done to bring down the cost of everyday goods and take on corporate price gouging," Boyle said, nodding to the November election in which former Republican President Donald Trump is facing Democratic Vice President Kamala Harris.
"While House Republicans continue trying to inflict higher costs and higher taxes on the middle class with Trump's Project 2025 agenda," he added, "House Democrats will never stop fighting to deliver an economy that works for working families."
Harris similarly applauded the "welcome news for Americans who have borne the brunt of high prices" while acknowledging that more must be done and vowing that "my focus is on the work ahead to keep bringing prices down."
"I know prices are still too high for many middle-class and working families, and my top priority as president will be to lower the costs of everyday needs like healthcare, housing, and groceries. That is why I am proposing plans to cut taxes for more than 100 million working and middle-class Americans, pass the first-ever federal ban on corporate price gouging on food and groceries, and make housing more affordable by building 3 million new homes and giving more Americans down payment assistance," she said.
The Democrat also took aim at Trump's intentions, warning that "while proposing more tax cuts for billionaires and big corporations, his plan would increase costs on families by nearly $4,000 a year by slapping a Trump Tax on goods families rely on, like gas, food, and clothing. He wants to repeal the law I cast the tie-breaking vote to pass that caps the costs of prescription drugs for seniors, including insulin at $35. He would end the Affordable Care Act and erase the progress we have made to lower premiums for millions of Americans by hundreds of dollars a year."
"Sixteen Nobel Prize-winning economists say his plan would increase inflation, and a Moody's report found it would cause a recession by the middle of next year," she noted. "This election is about whether we are going to finally build an opportunity economy that gives every American a shot not just to get by, but to get ahead. As president, that will be my priority every day."
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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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