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Federal-Reserve

Federal Reserve Chair Jerome Powell (center) sits with Federal Reserve Govs. Lael Brainard (left) and Miki Bowman (right) at an October 4, 2019 event at the Fed's headquarters in Washington, D.C. (Photo: Win McNamee/Getty Images)

The Fed Is Making a Big, Big Mistake

If the Fed continues down this path—as it has signaled it will—the economy will be plunged into a recession

The Federal Reserve just 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.

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. (See chart below, from the Economic Policy Institute.)

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.


© 2021 robertreich.substack.com
Robert Reich

Robert Reich

Robert Reich, is the Chancellor’s Professor of Public Policy at the University of California, Berkeley, and a senior fellow at the Blum Center for Developing Economies. He served as secretary of labor in the Clinton administration, for which Time magazine named him one of the 10 most effective cabinet secretaries of the twentieth century. His book include:  "Aftershock" (2011), "The Work of Nations" (1992), "Beyond Outrage" (2012) and, "Saving Capitalism" (2016). He is also a founding editor of The American Prospect magazine, former 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." Reich's newest book is "The Common Good" (2019). He's co-creator of the Netflix original documentary "Saving Capitalism," which is streaming now.

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