Jacquelyn Martin/AP Photo
Federal Reserve Chair Jerome Powell listens to a question at a news conference, September 21, 2022, at the Federal Reserve Board Building in Washington.
The dam is beginning to break in economic circles over the Federal Reserve’s dramatic interest rate hikes. Experts from both sides of the aisle have started to question the wisdom of the Fed’s policies.
Paul Krugman noted last week that the effects of the rate hiking can already be seen in sharp reductions in building permits and job openings and demand for apartments. Global trade is expected to fall off next year as well, and prices for inputs like semiconductors are dropping. Continued rate hiking in the face of these negative repercussions would be unwise, Krugman intimated. Indeed, even the biggest inflation hawks, like Larry Summers, have unwittingly admitted that top drivers of inflation like rent are leading indicators and are already going down.
In The Wall Street Journal, conservative economist Greg Mankiw and several others explained that Fed hikes threatened to overdo inflation-fighting. “Recessions are painful for a lot of people … you don’t want to cause more [pain] than is necessary,” Mankiw said. On the left, Columbia’s Adam Tooze explained that the Fed is exporting monetary tightening throughout the world, helping to create a “global deflationary cycle.”
And Tooze suggested the heart of the problem with all these tight-money policies: “Raising interest rates is not going to bring more gas or microchips to market, but rather the contrary.” When risking a recession that will inevitably affect the most vulnerable people in society, and outright financial crisis if borrowers cannot repay debts, you should at least be reasonably certain that your actions will work.
This insight, that interest rate spikes are ill-suited to the current economic moment, has even reached inside the Fed. Vice chair Lael Brainard, in a speech on Monday, acknowledged that retail profit margins have increased at roughly double the rate of wages since the outset of the pandemic. “There is ample room for margin recompression to reduce goods inflation as demand cools, supply constraints ease, and inventories increase.”
Yet despite the recognition of excessive markups and the cumulative effect of tightening globally, Brainard said that monetary policy “will be restrictive for some time to ensure that inflation moves back to target.” And other Fed officials are just as forthright that the beatings will continue until morale improves.
This was not supposed to be the trajectory for Jerome Powell’s Fed. Just last year, there was extended debate about whether President Biden should renominate him to another term as chair. In these debates, those inclined to support another term for Powell explicitly said that he had shifted the paradigm at the central bank and was uniquely situated to maintain full employment policies without succumbing to pressure to tighten monetary policy.
Inflation blew up that theory, and when circumstances change, policymakers should change with them. But this is the moment where this allegedly essential instinct of Powell, if it actually exists, should kick in. Leading indicators suggest inflation will moderate, perhaps significantly. Hammering through more rate hikes will explicitly immiserate workers, cause unemployment, and potentially trigger global recession. This is the moment where a Federal Reserve chair committed to full employment should face down the inflation hawks. In the telling of his backers, Powell was supposed to be that person.
The aura of Powell as someone on the right side of the economic issues has managed to neuter criticism from Democrats in the Senate.
“As Federal Reserve chair, Jerome Powell has broken sharply with this fixation on inflation,” said Dean Baker at this website. “He has listened to the complaints that progressive Fed critics have been making for decades.”
Indeed, the claim was that only Powell could carry on this break with the past. “The Fed’s monetary achievements under Powell,” pundit Josh Barro said at Business Insider, “are not automatic, and are fragile. You need someone with a commitment to pro-worker monetary policy at the head of the bank in the face of concerns about rising inflation. Who better than Powell himself, who has demonstrated both a commitment to the policy and an ability to gather political support for it and get it implemented?”
In other words, Powell alone—precisely because he’s a moderate Republican—was necessary to maintain political support for pro-worker monetary policies. Only he could fend off calls from Republicans for interest rate hikes, and gather together the disparate voices on the Federal Open Market Committee to hold the line.
None of this turned out to be true. Powell did not break with the Fed’s legacy of leaning toward the price stability element of its mandate. As soon as inflation crept up, even when the factors causing it had nothing to do with worker wage increases (which have been falling in real terms), Powell reverted right back to the traditional posture: attacking inflation, with labor falling wherever it may.
The idea that Powell could retain Republican support while engaging in full-employment policies can now also be revealed as mistaken. That Powell could sell dovishness to conservatives went out the window as soon as inflation surged. He was not a bulwark against a headlong rush into inflation-hawkery. His heralded diplomatic skills meant absolutely nothing. He proved as malleable to demands to tighten as any other Fed chair.
Nonetheless, the aura of Powell as someone on the right side of the economic issues has managed to neuter criticism from Democrats in the Senate. Because politicians love nothing more than to offload their problems on others, Senate Democrats are keeping relatively quiet as Powell steers the economy toward a downturn. That diplomatic skill isn’t being used to hold off Republicans from criticizing loose-money policies, it’s being used to hold off Democrats from criticizing tight-money policies.
Fortunately, economists aren’t playing along.
This is how Powell was sold by his backers, as someone who would stand strong for workers in the face of criticism. It didn’t happen at all. The supporters I’ve talked to say that they think a Democratic chair would have done the same thing, that inflation of this magnitude was always going to lead to some tightening. It’s true that Brainard was seen as Powell’s replacement if Biden were to remove him, and she’s largely on board with restrictive monetary policy, though she did exhibit some caution in her speech this week.
But that’s not the argument that was made before. Powell was described as someone who had shifted the tendencies at the Fed to such a degree that he would resist any temptation to tighten to such a degree that he would trigger the economic pain he seeks to avoid. It wasn’t true. That leaves us in a position of waiting helplessly for some mercy from interest rate hikes, which isn’t likely to come anytime soon. The consequences for ordinary working people are grave.
Newly crowned Nobelist Ben Bernanke observed in research in 1997 that “essentially all the U.S. recessions of the past thirty years have been preceded by both oil price increases and a tightening of monetary policy.” We currently have both. Jay Powell was sold as a powerful force against the latter. But he’s fallen in line, and is moving the world toward an unsustainable, grinding path. His supporters ought to answer for this.
