Psst! An urgent message for Jerome Powell
Further interest-rate hikes to fight inflation will worsen inequality. And they’re unnecessary.
As chairman of the Federal Reserve Board, you’re making your semi-annual policy report today to Congress.
I hope you don’t think me impertinent, but I have an urgent question for you that I hope one of the senators asks: How can you justify further rate hikes in light of America’s staggering inequality?
You and your colleagues on the Fed’s Open Market Committee are considering pushing interest rates much higher in your quest to get inflation down to your target of 2 percent. You believe higher interest rates will reduce consumer spending and slow the economy.
With due respect, sir, this is unnecessary, and it would be unjust.
Over the past year, you’ve raised interest rates at the fastest pace since the 1980s, from near zero to more than 4.5 percent.
But consumer spending isn’t slowing. It fell slightly in November and December but jumped 1.8 percent in January, even faster than inflation.
As a result, you’re now saying you may need to lift rates above 5 percent. A recent paper by a group of academic and Wall Street economists suggests that you will need to raise interest rates as high as 6.5 percent to meet your 2 percent 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.
Their current spending spree is a big reason you and your 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).
The higher rates are flowing back into the top fifth’s savings, on which they’re collecting interest.
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 you yank up rates. Take a look at this chart:
(Sources: J.P. Morgan Private Bank, Haver Analytics. Data as of October 2022.)
But yank up rates and you’ll impose big sacrifices on lower-income Americans. 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.”
There’s also no post-1950 precedent for the degree of income inequality Americans are now experiencing.
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. Relying on further interest-rate hikes to fight inflation will only worsen the consequence of America’s near-record inequality.
There’s no reason for further hikes, anyway. Inflation is already slowing.
I understand your concern, Mr. Powell. What looked like a steady albeit gradual slowdown is now looking even more gradual.
But so what? It’s the direction that counts.
You should abandon your 2 percent target rate of inflation. There’s nothing sacrosanct about 2 percent. Why not 4? Getting inflation down to 2 percent is going to cause too much pain for the most vulnerable.
And you should suggest to Congress that it use other tools to fight inflation, such as barring corporations with more than 30 percent market share from raising their prices higher than the overall inflation rate — as recently proposed by New York’s attorney general.
May I be perfectly frank with you, sir? It would be terribly unjust to draft into the inflation fight those who are least able.
Robert, I know you’re absolutely correct but, what do we do? How do we get the message to right people in Washington to stop this madness? To break up the corporate monopolies? To stop the rising interest rates? To get things back on track? The System is so broken that it seems downright impossible to change the trajectory of things. It’s depressing. Powell seems he’ll bent on breaking the backs of every day Americans to reach his impossible goal. He’s not stupid. He has to see what is obvious to you and the rest of us. He reads the numbers. Why is he doing this? Is he just another power hungry politician? Obsessed with his own agenda? I’m no economist but, even I can see that the economy is improving and that we don’t need further rate hikes. The man is obviously not stupid. Inflation is coming down. Corporations are gouging consumers and our representatives are doing nothing to stop them. These monopolies have to be broken up for the good of all and the health of our country and the people. We can’t keep existing like this. The inequalities between the rich and the poor are so huge now that we barely have a voice anymore.
This is one of the reasons it can be so tough to keep supporting Dems. It's clear the corporate friendly strategy isn't working for actual people, so what will they do? Keep it going with no lessons learned. No meaningful effort to stop corporate greed. No effort to take back the trillions that have been taken from the millions struggling due to the failure of government to reign in monopolies and consolidated industries.
Then, Dems will stand around wondering why so much misery and anger has built up that the GOP will get massive support from voters who are told the Dems are responsible for that pain. And so it goes...