'People Will Lose Their Jobs': Expert Chorus Against Fed Rate Hikes Grows

The expert chorus warning that the Federal Reserve is on the verge of plunging the U.S. into a painful recession has grown markedly louder in recent weeks as the central bank plows ahead with large interest rate hikes, ignoring alarm bells in the labor market and the overall economy.

With the Fed's next policy meeting just two weeks away, the Groundwork Collaborative on Tuesday cataloged more than a dozen recent comments from economists, fund managers, and other observers cautioning that aggressive rate hikes are already taking their toll on workers, economic growth, the housing market, and other key areas without tackling the core drivers of inflation--many of which are out of the central bank's control.

"The risk that high interest rates will cause severe economic damage has gone up--a lot."

"If the Fed keeps this up, they are going to have a serious recession and people will lose their jobs," Barry Sternlicht, the billionaire chair of Starwood Capital Group, said last month, just days before the Fed imposed its third 75-basis-point rate hike.

Such concerns from Sternlicht and other investors show that criticism of the Fed's rate hiking frenzy is hardly limited to progressive economists, who have been warning for months that the central bank's approach would likely inflict serious pain on workers while leaving untouched corporate profiteering, supply chain snags, and other inflationary pressures.

"The dam is beginning to break in economic circles over the Federal Reserve's dramatic interest rate hikes," The American Prospect's David Dayen observes. "Experts from both sides of the aisle have started to question the wisdom of the Fed's policies."

Groundwork pointed to a recent assessment by conservative economist Greg Mankiw, a former George W. Bush administration official who told The Washington Post last week that he's worried the Fed may be overdoing the rate hikes, which are aimed at crushing economic demand by making borrowing more expensive.

In a blog post earlier this month, Mankiw voiced agreement with liberal economist Paul Krugman's argument in a recent New York Times column that the Fed may be "braking too hard."

"Do we know for sure that the Fed is braking too hard? No," Krugman wrote. "The current economic situation is full of uncertainty, and any policy decision involves making trade-offs among various risks. What we can say is that the risk that the Fed is moving too slowly to contain inflation has declined, while the risk that high interest rates will cause severe economic damage has gone up--a lot."

"Right now the Fed seems set to pursue further big rate hikes in the coming months," Krugman added. "I would urge it to look hard at what's happening and think twice."

Last week, the Labor Department's Consumer Price Index (CPI) showed that inflation rose in September, driven to a significant extent by rent.

The hotter-than-expected data heightened fears that the Fed--which has made clear it is more concerned about not going far enough in its inflation fight--will enact a major interest rate increase at its early November meeting and potentially another in December even as recession signals blare, with the economy, hiring, and wage growth slowing and jobless claims ticking up.

Economist Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania, argued in a CNBC appearance Monday that another large interest rate hike would be a serious mistake, noting CPI is a lagging indicator that doesn't offer an accurate picture of current inflation.

"It's giving a totally distorted view of the actual, on-the-ground inflation," said Siegel, who has emerged as an outspoken critic of the central bank, warning it could "drive the economy into a depression."

Last month, Siegel took aim at Powell's stated effort to "get wages down" and increase joblessness in order to rein in inflation.

"It seems to me wrong for Powell to say we're going to crush wage increases, we're going to crush the worker, when that is not the cause of the inflation," Siegel said.

Grave concerns about the Fed's policy decisions aren't just coming from inside the U.S.

In recent weeks, officials at the International Monetary Fund, the World Bank, and the U.N. Conference on Trade and Development (UNCTAD) have said rate increases by the Fed and other powerful central banks could spark a global recession, with poor countries bearing the brunt of the impact.

"Not only is there a real danger that the policy remedy could prove worse than the economic disease, in terms of declining wages, employment, and government revenues, but the road taken would reverse the pandemic pledges to build a more sustainable, resilient, and inclusive world," UNCTAD said in a recent report.

Groundwork on Tuesday pointed to comments from IMF chief economist Pierre-Olivier Gourinchas, who cautioned last week that "monetary policy could miscalculate the right stance to reduce inflation."

"Global tightening in financing conditions," he added, "could trigger widespread emerging market debt distress."