As chairman of the Federal Reserve board, Jerome Powell is making his semi-annual policy report to Congress this week. I have an urgent question for Powell that I hope members of Congress will also ask: how can he justify further rate hikes in light of America’s staggering inequality?
Powell and his colleagues on the Fed’s open market committee are considering pushing interest rates much higher in their quest to get inflation down to their target of 2%. They believe higher interest rates will reduce consumer spending and slow the economy.
With all due respect, this is unnecessary – and unjust.
Over the past year, the Fed raised interest rates at the fastest pace since the 1980s, from near zero to more than 4.5%. But consumer spending isn’t slowing. It fell slightly in November and December but jumped 1.8% in January, even faster than inflation.
As a result, Powell is now saying he may need to lift rates above 5%. A recent paper by a group of academic and Wall Street economists suggests that he will need to raise interest rates as high as 6.5% to meet his 2% target.
This would worsen America’s already staggering inequalities.
You see, the Americans who are doing most of the spending are not the ones who will be hit hardest by the rate increases. The biggest spenders are in the top fifth of the income ladder. The biggest losers will be in the bottom fifth.
Widening inequality has given the richest fifth a lot of room to keep spending. Even before the pandemic, they were doing far better than most other Americans.
The top fifth’s savings are still much higher than they were before the pandemic, so they can continue their spending spree almost regardless of how high the Fed yanks up rates.
That spending is a big reason Powell and his colleagues at the Fed are having so much difficulty slowing the economy by raising interest rates (in addition to the market power of many big corporations to continue raising prices and profit margins).
Those higher rates are flowing back into the top fifth’s savings, on which they’re collecting interest. But yank up rates much more and we’ll impose big sacrifices on lower-income Americans.
Powell himself has predicted that at least 2 million people will lose their jobs if he raises interest rates to 4.6% by the end of the year.
The study I mentioned a moment ago concludes that “there is no post-1950 precedent for a sizable central-bank-induced disinflation that does not entail substantial economic sacrifice or recession”.
Well, there’s also no post-1950 precedent for the degree of income inequality America is now experiencing.
Relying on further interest-rate hikes to fight inflation will only worsen the consequence of America’s near-record inequality. The people who will endure the biggest sacrifices as the economy slows will be the first to lose their jobs: mostly, those in the bottom fifth.
There’s no reason for further hikes, anyway. Inflation is already slowing.
I understand Powell’s concern. What looked like a steady, albeit gradual, slowdown is now looking even more gradual. But so what? It’s the direction that counts.
He should abandon the 2% target rate of inflation. There’s nothing sacrosanct about 2%. Why not four? Getting inflation down to 2% is going to cause too much pain for the most vulnerable.
And Powell should suggest to Congress that it use other tools to fight inflation, such as barring corporations with more than 30% market share from raising their prices higher than the overall inflation rate – as recently proposed by New York’s attorney general.
Mr Powell, if you’re reading, may I be perfectly frank? You weren’t elected to your current post. Nor were your colleagues. That’s understandable. The Fed needs to be insulated from politics. But you at least owe it to America to do your job fairly.
It would be terribly unjust to draft into the inflation fight those who are least able.
Robert Reich, a former US secretary of labor, is professor of public policy at the University of California, Berkeley, and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
