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Wednesday, November 30, 2022

The Federal Reserve cannot solve supply problems, but it can make people poorer

People will not accept jobs because Democrats have given them too much money, according to Senate Minority Leader Mitch McConnell (R-Ky.).

“You have a whole bunch of people sitting on the sidelines because, honestly, they’s flushing for the moment,” McConnell told the Paducah Area Chamber of Commerce in his home state this week. “What we have to hope for is that as soon as they run out of money, they will start to conclude it’s better to work than not to work.”

McConnell’s statement may have been a standard right – wing grievance, but the idea that the American people currently have too much spending power also happens to be the guiding principle of the federal government’s main economic policy while trying to stem unbridled inflation.

Federal Reserve officials do not agree with Republicans that Democratic stimulus spending alone caused inflation. They constantly cited supply issues as a major contributor – although they were wary of playing referee in the debate over why prices rose.

But the Fed can do nothing about COVID restrictions in China or the war in Ukraine. The central bank can only suppress demand by raising interest rates, and it does so at the fastest pace in decades. Higher interest rates make loans more expensive, which means people and businesses are more likely to take out fewer loans and spend less money. Reduced consumer spending means fewer jobs.

“Our goal is actually to bring inflation down to 2% while the labor market remains strong,” Federal Reserve Chairman Jerome Powell told a news conference last month. “I think what’s becoming clearer is that a lot of factors that we do not control are going to play a very important role in deciding whether it is possible or not.”

“By aggressively delaying demand, [the Federal Reserve] can very well cause an economic downturn and get many people fired and make people poor, make families poor, even if they are already struggling with rising prices. ”

– Jin Woo Chung, Senior Economist at the Groundwork Collaborative Progressive Brainstorm

Some economic indicators suggest that the labor market may already be cooling down. On Friday, the Labor Department reported strong but slightly slower employment and wage growth in June than in previous months. Heidi Shierholz, president of the Liberal Institute for Economic Policy, said “this slowing wage growth means the Fed does not need more interest rate hikes to curb inflation.”

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Powell and other Fed officials use bureaucratic language to disguise the possible collateral damage of their efforts to bring down prices and restore the “balance” in supply and demand, both for products and workers. At their meeting last month, the Fed’s decision-makers said they expected “an appropriate strengthening of monetary policy would play a key role in helping to address labor market imbalances,” according to minutes of the meeting released this week.

In a tight labor market with more jobs than workers to fill, restoring balance can simply mean fewer jobs. Or it could mean more mass retrenchments. Either way, the Fed expects higher interest rates to push the national unemployment rate up by about half a percentage point to 4.1% over the next two years. Many economists think the Fed’s forecasts underestimate the likelihood of worse pain.

“Delaying demand too aggressively could very well cause an economic downturn and get many people fired and make people poor, make families poor, even though they are already struggling with rising prices,” said Jin Woo Chung, senior economist at the Progressive Party. brainstorm Groundwork Collaborative, said in an interview.

Chung believes that because supply problems contribute to inflation – a recent analysis found by economists at one of the Fed’s regional banks that supply was responsible for at least half of price increases – the government should not just respond by attacking demand. Instead, Chung said the Biden administration and Congress should target price cuts and corporate profit-seeking.

A small number of Democrats have begun to guess the Fed’s strategy given the prevalence of supply problems. At a hearing last month, Sen. Elizabeth Warren (D-Mass.) Asked Powell whether higher interest rates would directly reduce gas or food prices, and Powell admitted they would not.

“At the moment, the Fed has no control over the main drivers of rising prices, but the Fed can delay demand by firing many people and making families poorer,” Warren said. “Do you know what is worse than high inflation and low unemployment? It is high inflation and a recession with millions of people without jobs. “

Sen. Jon Tester (D-Mont.) Pressured Powell whether high interest rates would cause a recession.

The central bank’s goal is to change people’s perceptions of where inflation is going, said Erica Groshen, a senior economic adviser at Cornell University School of Industrial and Labor Relations.

“They are trying to convey to the markets and to individuals that they are not going to be content with very high inflation for a long time, that they are willing to slow down the economy if necessary to get closer to the inflation targets.” Groshen said.

If people and businesses expect inflation to continue, their behavior can actually make it worse – for example, as workers’ demand increases solely to offset potential future increases in the cost of living. The Fed is closely monitoring inflation expectations; show his own recordings that household expectations have started to shoot up since last year.

“They do not want to cause a recession, but to some extent people have to believe that they are willing to cause a recession if they have to,” Groshen said. “When you have very high inflation expectations, you really need a recession to bring it down.”

McConnell said it was unfortunate that Democrats caused inflation by adopting the U.S. bailout plan in early 2021, a bill that increased the value of unemployment benefits and paid out $ 1,400 stimulus checks. (Senate Republicans have previously supported two major stimulus bills that sent checks to people.)

“That decision last year on a party-line basis to drop $ 2 trillion on the economy was a huge mistake,” he said.

As for McConnell’s claim that workers reject jobs because they flush with cash, Matt Darling, an employment policy fellow at the Niskanen Center, a centrist think tank, pointed out that the employment-to-population ratio for workers with a high age years reached pre-pandemic levels (although it was slightly below its 2020 peak in June). Bank JPMorgan Chase said checking account balances had continued to increase since the start of the pandemic; a separate measure of how much money people save has dropped to pre-pandemic levels.

Darling joked with the idea that people are still sitting around because they received a stimulus check in April 2021.

“The idea that there are a lot of people who are like, ‘Oh, I have $ 2,000, I’m going to surf around with it for 18 months,’ – that’s really unlikely,” Darling said.

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