(Photo: Olivier Douliery/AFP via Getty Images)
Aug 26, 2022
Federal Reserve Chair Jerome Powell said in a closely watched speech Friday that the U.S. central bank is ready to inflict "pain" on households as it continues to fight inflation, remarks that drew widespread backlash from experts who warned the Fed appears poised to spark a devastating recession and mass layoffs.
"The Fed apparently won't stop raising rates until millions more are unemployed."
Addressing a symposium of financial elites gathered in Jackson Hole, Wyoming, Powell said that "there will very likely be some softening of labor market conditions"--euphemistic phrasing for higher unemployment--as the Fed aggressively jacks up interest rates, slowing demand across the economy by making borrowing more expensive.
"While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," Powell continued.
But the Fed chief argued that such pain would be worth it because "a failure to restore price stability would mean far greater pain."
\u201cFederal Reserve Chair Powell: "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation." https://t.co/GtfhIYXjOf\u201d— The Hill (@The Hill) 1661532360
Economist Robert Reich, the former U.S. labor secretary, responded bluntly to Powell's comments: "This is nuts."
"True, inflation is near a four-decade high," Reich wrote in a blog post. "But the Fed's aggressive effort to tame it through steep interest rate hikes--the fastest series of rate hikes since the early 1980s--is raising the risk of recession. If it raises rates again in September by another three-quarters of a point, which seems likely given Powell's remarks today, the risk becomes larger."
"The pain is already being felt across the land," Reich added. "Most Americans aren't getting inflation-adjusted wage increases, which means they're becoming poorer."
"Aggressive rate hikes can't address the root causes of inflation."
Powell's speech was seen by many observers as his most hawkish message yet as the central bank attempts to rein in inflation with a blunt tool that is unlikely to mitigate the causes of price surges in the U.S. and globally, something the Fed chair has openly admitted to lawmakers.
"The Fed's problem remains that constraining demand can't do anything about the primary drivers of inflation--supply chain snarls, the war in Ukraine, and corporate profiteering," tweeted Claire Guzdar of the Groundwork Collaborative. "Our problem remains that the Fed apparently won't stop raising rates until millions more are unemployed."
Rakeen Mabud, Groundwork's chief economist, echoed that message, noting that "aggressive rate hikes can't address the root causes of inflation."
"Mass unemployment is not the path forward to a healthy and inclusive economy," Mabud added. "Let's be clear: aggressive rate hikes aim to bring down prices by increasing unemployment. Fed Chair Powell is ready to throw workers under the bus to save the 'economy.' But we are the economy."
The Fed has thus far shown no indication that it's prepared to change course despite evidence of slowing economic growth, decelerating wage increases, and cooling inflation.
As CNBCreported Friday ahead of Powell's address, the Fed's preferred inflation measure showed that price pressures eased in July, building on better-than-expected Consumer Price Index (CPI) data released earlier this month.
But in his speech Friday, Powell said he and other central bank officials are drawing on lessons learned from high inflation in the 1970s and 1980s, when then-Fed Chair Paul Volcker infamously imposed high interest rates that hurled the economy into recession and sent unemployment soaring.
"The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years," Powell said. "A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now."
William Spriggs, chief economist at the AFL-CIO, warned in a social media post Friday that Powell's speech is "bad news."
"Two straight quarters of falling GDP, falling real disposable income, falling real wages, falling government expenditures and the Federal Reserve, in the face of these headwinds, continued global supply shocks, and weakened world growth, is seeing ghosts," Spriggs wrote.
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