The message from the left for the Fed: Stop punishing workers

The message from the left for the Fed: Stop punishing workers

“It’s a throwback to the bad old days,” said Benjamin Dulchin, campaign leader of Fed Up, a coalition of community groups and labor unions. “Overreacting and sticking with the workers because it’s the only thing they know they can do is the same old prejudice.”

Fed Up was among progressive groups that praised Republican Powell when he said in 2020 that the Fed would focus more on workers by refraining from raising interest rates for as long as possible – defiantly decades of central bank policy by adopting a new labor policy. -frame centered in the aftermath of the civil unrest following the murder of George Floyd.

But Powell — who will address the labor market situation at a Brookings Institution event on Nov. 30 — is now battling persistent, raging inflation, a post-pandemic trend the Fed didn’t see coming. This prompted policymakers to revert to their traditional objective of fighting inflation by raising borrowing costs, even if that leads to higher unemployment and triggers a recession.

The criticism is the first sign of eroding political support for Powell, who sailed toward confirmation of a second term with 80 votes in the Senate in May. While he still enjoys White House support and bipartisan deference, his quest for a slow hire will likely lead to more broadsides from the new Congress in the form of legislative proposals, oversight hearings and letters of anger.

Critics of Powell say much of the inflation is due to factors beyond the Fed’s control, such as supply chain issues, and cite signs that inflation is already starting to subside , as evidenced by the latest Consumer Price Index report. Progressives like Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) also blame the companies for taking advantage of the situation and raising prices excessively.

Warren recently led 10 other lawmakers to call the Fed’s rate hikes “alarming” and demand an additional explanation for them. Other Democrats like Brown, an Ohio Democrat who oversees the Fed as chairman of the Senate Banking Committee, and the senator. John Hickenlooper from Colorado also weighed in.

Powell does not back down. While he and other Fed policymakers have signaled that future increases in borrowing costs will be more gradual as they gauge the impact on the economy, they also say rates still have a lot to go up. .

Senior central bank policymakers say they are open to signs that inflation can ease without hurting jobs too much; for example, a key measure of employer compensation costs, particularly weighted by the Fed, shows that private sector wages are slowing. But they are not yet convinced. Powell stressed at his press conference in early November that he still believed the labor market was “unbalanced”.

For now, the market is still so robust that the demand for labor far exceeds the number of people available to fill positions. Powell says he will have to soften — which could mean anything from fewer job offers to mass layoffs — a message echoed by other Fed officials last week. More broadly, he argues that while job losses are painful for many families, inflation hurts everyone, especially low-income people.

“I don’t think the Fed’s goal is to have a weaker labor market; its goal is to have lower inflation,” said Jason Furman, a Harvard professor who served as President Barack Obama’s chief economist. “They say if unemployment starts going up, we’re going to keep doing it.”

Traditional economic models suggest that falling unemployment and rapid wage growth are linked to inflation, a framework that led former Treasury Secretary Larry Summers to suggest that the jobless rate will need to rise to 6%, versus 3.7% in October, to fight inflation properly.

For their part, Fed officials said in September that they expected their exchange rates to push unemployment up to 4.4% by next year, which could translate into more one million job losses. But they don’t target a certain level of employment.

“We’re never going to say there are too many people working, but the real problem is this: inflation – what we hear from people when we meet them is that they are really suffering from inflation,” Powell told reporters on the occasion. time. “And if we’re going to set ourselves up, really light the way to another period of a very strong labor market, we have to put inflation behind us. I wish there was a painless way to do that. . There are not any.

Therein lies the dilemma: what is the best way to bring inflation down, if not by the cudgel of higher interest rates? The existing playbook is not extended.

Lindsay Owens, executive director of the progressive think tank Groundwork Collaborative, argued that it should be opportunistic businesses, not workers, who should pay the cost of reducing inflation, through a tax on the so-called excess profits.

“We’ve seen more and more examples of companies talking about seeing their input costs go down or seeing a future in which their input costs go down,” she said. , citing corporate earnings calls with shareholders. “And then pivot to say, ‘That’s really good news, because we’re going to keep the price the same’, or in some cases, say, ‘We’re going to do more price increases.'”

Skanda Amarnath, executive director of labor advocacy group Employ America, said the Fed could also slow economic activity without aiming to drive up unemployment. He said the goal of aggressive government spending in the wake of the pandemic was to bring the economy back to pre-pandemic employment levels. Now that the labor market has largely recovered, “we don’t need that much growth right now to keep employment high.”

“It’s the middle ground,” he said. “They kind of just said it didn’t exist, which is wrong and problematic.”

But many economists say it’s an open question whether the labor market itself will have to be a casualty in the fight against inflation, or whether it could just be collateral damage.

“Can inflation come back [Fed’s] 2% target, given wage growth? said Guy Berger, senior economist at LinkedIn. “Many mainstream economists and the Fed probably think not, because wage growth by itself and raising costs will put upward pressure on inflation.”

Furman said the problem is that the economy cannot produce enough to meet the demand for goods and services, and inflation is the result.

“Demand remains high, and that’s why workers are encouraged to ask for bigger increases, and that’s why companies are encouraged to ask for bigger price increases,” he said, which higher levels help to suffocate. “It’s the only way we know to get rid of inflation.”

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