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Robert Reich: The Fed’s Big Mistake – OpEd

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The Federal Reserve raised interest rates by three-quarters of a percentage point, the biggest single increase in interest rates since 1994. It’s another move in the Fed’s effort to tackle the fastest inflation in four decades.

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I understand the Fed’s urgency, but it has entered dangerous territory. If the Fed continues down this path – as it has signaled it will – the economy will be plunged into a recession. Every time over the last half century the Fed has raised interest rates this much and this quickly, it has caused a recession.

Besides, interest rate increases will not remedy the major causes of the current inflation – huge pent-up worldwide demand from two years of pandemic, shortages of goods and services responding to that demand, Putin’s war in Ukraine, and big profitable corporations with enough pricing power to use inflation as a cover for pushing up prices even further.

The Fed assumes that price increases are being driven by wage increases — so-called “wage-price inflation.” That’s incorrect. Wages are lagging behind inflation. A more accurate description of what we’re now seeing might be called “profit-price inflation” — prices driven upward by corporations seeking increased profits.

A recession will be especially harmful to people who are most vulnerable to downturns in the economy — who are the first to be fired (and last to be hired again when the economy turns upward): lower-wage workers, disproportionately women and people of color.  

The Fed is making a big mistake.

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Robert Reich

Robert B. Reich is Chancellor's Professor of Public Policy at the University of California at Berkeley and Senior Fellow at the Blum Center for Developing Economies, and writes at robertreich.substack.com. Reich served as Secretary of Labor in the Clinton administration, for which Time Magazine named him one of the ten most effective cabinet secretaries of the twentieth century. He has written fifteen books, including the best sellers "Aftershock", "The Work of Nations," and"Beyond Outrage," and, his most recent, "The Common Good," which is available in bookstores now. He is also a founding editor of the American Prospect magazine, chairman of Common Cause, a member of the American Academy of Arts and Sciences, and co-creator of the award-winning documentary, "Inequality For All." He's co-creator of the Netflix original documentary "Saving Capitalism," which is streaming now.

3 thoughts on “Robert Reich: The Fed’s Big Mistake – OpEd

  • June 17, 2022 at 12:12 pm
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    Have Janet read this!! And Biden so he can do something like freeze prices or reverse prices at the pump. I’ve seen gas lines, there aren’t any shortages, just greed. And Biden needs to do something to stop it.

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  • June 17, 2022 at 5:59 pm
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    I think that Robert is correct about the causes of inflation. However, I don’t think that the FED has made a big mistake yet. Pushing up interest rates from historically low to more normal rates where one can earn a little interest on their savings is probably a good thing. Hopefully the FED won’t overshoot & raise rates too high.

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  • June 17, 2022 at 6:56 pm
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    If inflation is too many dollars chasing too few goods, then either a) reduce the number of dollars, or b) increase the number of goods.

    Fed’s rate increase and balance sheet reduction is working to reduce the number of dollars, by reducing the dollars from loans and investment assets. Sufficiently reducing the number of dollars will bring down inflation regardless if “wage-price inflation” or “profit-price inflation”. Of course, recession risk will increase.

    The supply chain disruptions from the pandemic, Trump trade war, Ukraine war, all contributed to the decrease in goods. Come 6/21/2022, Biden’s Uyghur Forced Labor Prevention Act (UFLPA) may further restrict the number of goods, depending on implementation, because ALL goods manufactured in China, or have parts manufactured in China, could have Uyghur labor. The paperwork to contest could clog our ports and customs.

    Biden’s illegal seizure of Russian sovereign assets (per Yellen), clearly communicated to the world that the US will no longer strictly uphold the capital asset ownership core value of Capitalism. It would be negligent for foreign powers not to reduce their risk exposure. The Fed’s interest rate increase and balance sheet reduction, triggered stock market downward spiral will intensify that pressure.

    Intentional or unintentional, the current US policy is coordinated to trigger a recession.

    Reply

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