If there’s one good thing about this economy, it’s the labor market. Wages are rising, unemployment is down to near-historic lows, and workers have more leverage over their employers than they’re used to. But Federal Reserve chair Jerome Powell has had enough of that, and it seems he’d like to see you out of a job.
“These are the unfortunate costs of reducing inflation,” he said of the prospect of millions of people getting pink-slipped. And that’s indeed the likely outcome of his aggressive approach to tackling inflation by sharply raising interest rates, as the Fed did — yet again — Wednesday afternoon. With its latest announcement of the third consecutive 0.75 percentage point hike, the Fed is increasing interest rates at the fastest rate since the 1980s.
Let’s be clear: Unemployment is not an unintended byproduct of raising interest rates; it’s Powell’s goal. As the Fed’s main tool to fight inflation, higher interest rates help cool the economy because they make credit more expensive. That means people and companies are less likely to borrow money and spend it, leading to a dip in investment and overall demand for goods and services. And as companies anticipate, or eventually deal with, this decline in business, they start to reduce their overhead costs by laying workers off.
The more unemployment there is, the less money people will have to spend. Powell is presumably hoping that reducing demand this way would lead to lower prices. And that is generally how it works — the less demand there is for a given product, the less businesses can charge for it. But the problem in Powell’s calculus is that it assumes the supply of that product will remain constant, and given the current, extremely uncertain state of global supply chains, that is a bad assumption to make.
That’s why aggressively raising interest rates in this particular economy is the wrong course of action. While high demand is certainly contributing to inflation, so too are supply shocks. And no matter what Powell does, there is nothing he can do to ease supply chain bottlenecks. What that means is that even if there is a spike in unemployment — and a consequent drop in aggregate demand — that won’t necessarily lead to lower inflation. In fact, it means that the United States could enter a prolonged period of high unemployment and high inflation, the worst possible combination for middle- and low-income households.
And yet Powell is acting as if interest rates are like an efficient central air conditioner — just dial up the thermostat and instantly feel the temperature change. But raising interest rates in this economy is more like having Powell turn on a single dinky old window unit and expecting it to cool his entire house. (Oh, and by the way, that old window unit could blow a fuse and cause a power outage at any moment. The Fed, in other words, could help trigger a global recession, as the World Bank has warned.)
Powell should know this, which is why it’s mind boggling that he is insisting to go down this road. It’s true that maintaining price stability is part of the Fed’s mandate, but so is maximum employment. It’s clear that Powell prioritizes the former, so much so that he is willing to accept job losses in the bargain. And that’s unfortunate because as bad as it is, the inflation Americans are currently experiencing is still far more manageable and less painful than high unemployment.
So what should the Fed do? Raising interest rates is a fine step, but it has to be done much more incrementally in order to reduce the risks of catastrophic unemployment. More importantly, Powell must accept that his goal of keeping the inflation rate at 2 percent is unrealistic in the near term. That has long been the Fed’s inflation target, but current circumstances call for some degree of tolerance for higher prices — not permanently, to be sure, but until the global economy, supply chains, and energy prices become more stable. Maintaining a strong labor market is well worth it.
This is not to say that the Fed ought to be complacent. And if the inflation rate rises significantly, then obviously Powell could adjust his posture accordingly. But so long as that’s not the case, there’s no reason for him to be overly proactive, especially since there have been signs, albeit mixed, that inflation might be easing. Until there is more clarity on how inflation is trending, it’s safe to assume that Powell knows that his actions might unnecessarily cost you your job. He just doesn’t seem to care.