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Macroscope | Why US workers and their wages are the real target in Fed’s war on inflation
- The Federal Reserve’s planned interest rate increases show it has bowed to pressure from economists and financiers
- Whether it is intentional or not, the US central bank’s war on inflation will in reality be a war on American workers and their interests
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US Federal Reserve chair Jerome Powell has now committed to putting US monetary policy on a course of rising interest rates, which could boost the short-term rate by at least 200 basis points by the end of 2024. Thus, Powell yielded to pressure from economists and financiers, resurrecting a playbook the Fed has followed for 50 years – one that should have remained in the vault.
The stated reason for tightening monetary policy is to fight inflation. But interest rate increases will do nothing to counteract inflation in the short term and will work against price increases in the long run only by bringing on yet another economic crash.
Behind the policy is a mysterious theory linking interest rates to the money supply, and the money supply to the price level. This “monetarist” theory goes unstated these days for good reason: it was largely abandoned 40 years ago after it contributed to a financial debacle.
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In the late 1970s, monetarists promised that if the Fed would focus only on controlling the supply of money, inflation could be tamed without increasing unemployment. In 1981, Fed chair Paul Volcker gave it a try.
Short-term interest rates soared to 20 per cent, unemployment reached 10 per cent and Latin America spiralled into a debt crisis that nearly took down all the large New York banks. By the end of 1982, the Fed had backed off.
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As Hongkongers struggle with rising inflation, the city’s most vulnerable are the hardest hit
As Hongkongers struggle with rising inflation, the city’s most vulnerable are the hardest hit
Since then, there has been almost no inflation to fight, owing to low global commodity prices and the rise of China. But the Fed has periodically shadowboxed with “inflation expectations” – raising rates over time to pre-empt the invisible demons and congratulating itself when none appeared.
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