Fed hikes interest rates to fight inflation by driving wages down

The Federal Reserve raised interest rates by three-quarters of a point on Wednesday, July 27, 2022, a move aimed at driving wages down so that the most affluent in society can avoid economic losses.

Federal Reserve Chairman Jerome Powell has sought to throw cold water on the hot labor market, inviting economic black clouds to loom over U.S. employment—the one bright spot in an American economy plagued by rapid inflation that climbed to 9.1 percent in June, compared to the previous year, and besieged by supply chain interruptions that results from the coronavirus shatdowns.

While inflation is at the highest level in about four decades, as measured by the Consumer Price Index (CPI), but resurgent inflation is by no means solely a U.S. concern.

A Pew Research Center analysis of data from 46 nations finds that the third-quarter 2021 inflation rate was higher in most of them (39) than in the pre-pandemic third quarter of 2019. In 16 of these countries, including the U.S., the inflation rate was more than two percentage points higher last quarter than in the same period of 2019. 

International comparisons also show an obvious trend, with relatively low inflation before the COVID-19 pandemic struck in the first quarter of 2020 turning into a high rate of inflation as the world pulls out of the health emergency with supplies insufficient to meet the consequent demand.

At a May 4 press conference in which he announced a half-percent interest rate hike, the greatest since 2000, Powell said he thought higher interest rates would limit business’ hiring demand and lead to suppressed wages.

By reducing hiring demand, Powell said “that would give us a chance to get inflation down, get wages down, and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”

“With wage growth declining in recent months, our country’s lowest-paid, most vulnerable workers have endured too much already to be sacrificed in pursuit of severe rate hikes that have far too often triggered recessions,” said Rep. Pramila Jayapal (D-Wash.), the leader of the Congressional Progressive Caucus.

This is the second hike in a row of that size—and fourth overall in 2022—as officials race to tame inflation and cool down an overheating economy.

The Fed started raising interest rates in March when the fed funds range was zero to 0.25 percent.

“The big takeaway is that the Fed is now deep into its price stability campaign,” , said Joe Brusuelas, chief economist at RSM. “If the Fed does not nip this in the bud, it’s setting itself up for institutional failure.”

By leaving the problem of inflation to the central bank, Democrats are accepting an intentional attack on labor rather than addressing the real issues of corporate greed, global supply chain problems and .

The financial markets rallied on Powell’s hints that the Fed could slow the pace of its rate hikes in the coming months. Powell left the door open for another rate hike of three-quarters of a percentage point at the next policy meeting in September. 

At a recent hearing, Senator Elizabeth Warren told Powell, “You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work.”

Another 372,000 jobs were added in June, far more than economists had projected, and the unemployment rate held steady at 3.6%.

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