Elizabeth Warren is a Democratic senator from Massachusetts
Even as the pandemic continues to take its toll, the US has experienced a surprisingly strong economic recovery. Since the inauguration of President Joe Biden, the US economy has created 9 million new jobs. Private sector employment has fully recovered. But the Federal Reserve led by Jerome Powell stands On the brink of sacrificing all this progress in its effort to rein in inflation.With Powell expected to announce another round of aggressive rate hikes, the Fed risks starting a potentially devastating recession.
● Rich Americans continue to borrow money, indifferent to the gloomy state of the economy
● The Fed is tightening policy, and economists fear it will go too far
Inflation is a worldwide phenomenon that causes great financial pain to families everywhere. Price increases are an urgent problem, and interest rates play a major role in maintaining price stability. But the urgency is no excuse for escalating dangerous action in response to it. Like any disease, the right medicine starts with a correct diagnosis. Unfortunately, the Fed has resorted to aggressive rate hikes—a large dose of the only cure it knows—even while they are largely ineffective against many of the underlying factors driving inflation.
Powell recognizes this. Testifying before the Senate Banking Committee in June, he noted that higher interest rates probably won’t bring down gas or food prices. “There are many things we cannot influence,” he admitted at a press conference in June – that is, the main causes of today’s inflation. Higher interest rates will not end the spike in energy prices caused by Putin’s war against Ukraine. They will not fix the supply chains that still need rehabilitation after the pandemic. And they will not break up the corporate monopolies that Powell admitted in January that may “raise prices because they can.”
If the Fed’s rate hikes don’t address many of the causes of today’s inflation, it’s worth asking: what do they do?
When the Fed raises interest rates, and increases the cost of borrowing money, it becomes expensive for companies More invest in their activities. As a result, employers are slowing hiring efforts, reducing workers’ hours and laying off others, leaving families with less money. In the brutal language of economics, this is known as “reducing demand”. But make no mistake: If the Fed cuts too quickly or too drastically, the resulting recession will leave millions of people—disproportionately mostly low-wage workers and nonwhites—with smaller or no paychecks.
The likelihood that too enthusiastic interest rate hikes will trigger a recession increases. Goldman Sachs warned that the Fed’s policy is more aggressive than necessary and doubled the likelihood in their forecast that the economy will enter a recession next year. Nobel Prize-winning economist Peter Diamond warned of the significant risk of a downward crash from the Fed’s aggressive approach. Powell even acknowledged that the Fed’s actions could cause declines, saying a recession “is not the outcome we want at all, but it is certainly a possibility.”
Despite these warnings, the Fed chairman is still getting encouragement from the fringes about the approach of raising interest rates. Among the main cheerleaders is Larry Summers. “We need unemployment to be higher than 5% for five years to contain inflation – in other words – we need two years of unemployment at 7% or five years of unemployment at 6% or one year with 10% unemployment,” he said recently in a speech in -LSE. You read that right: 10% unemployment. That’s something said by someone who never had to worry about where their next paycheck was going to come from.
If Powell and Summers get their way, the resulting recession will be brutal. As in past downturns, Republicans in Congress will seek austerity measures – tax cuts for large corporations and the wealthy, less regulation of large corporations, and little financial support for the most vulnerable people in the economy. Democrats should prepare to reject the Republican rulebook and prepare to help working families survive.
But it doesn’t have to happen that way. The Biden administration recognizes that the U.S. has many tools to fight inflation without shrinking the economy and making Americans poorer. The president has taken a variety of actions. USA and caused one of the fastest declines in fuel prices in more than a decade. In order to lower food prices, he devoted a billion dollars to the expansion of meat processing plants. In order to fix problems in the supply chain, Biden addressed the bottlenecks of ships carrying goods in our ports. And to fight the corporate monopolies that use inflation as an excuse to pad their bottom line, the president empowered the most aggressive antitrust enforcers of our generation.
Congress needs to do its part to fight inflation. Investing in affordable, high-quality child care will lower costs because it will bring more than a million more parents into the workforce. Ending tax breaks for companies that set up operations outside the US and investing in American manufacturing will create good jobs and strengthen supply chains. Allowing Medicare to negotiate prescription drug prices will lower health care costs. And giving the Biden administration more tools to strengthen competitiveness will help fight coordination Prices by the big companies.
Before the Federal Reserve causes a recession, Powell should remember that one of the remedies in his toolbox doesn’t even treat an economic disease. Low unemployment and high inflation are painful, but a Fed-induced recession that leaves millions of Americans unemployed without addressing rising prices would be much worse.