“It’s a return to the bad old days,” said Benjamin Dulchin, head of the Fed Up Campaign, a coalition of community groups and unions. “Overreacting and clinging to working people because it’s the only thing they know they can do, it’s the same old prejudice.”
Fed Up was among the progressive groups that praised Powell, a Republican, when he announced in 2020 that the Fed would focus more on workers by holding off on raising interest rates for as long as possible, breaking with decades of central bank policy to embrace a new workforce. -centered frame after the civil unrest following the murder of George Floyd.
But Powell, who will address the labor market situation at the Brookings Institution on Nov. 30, is now grappling with persistent and rampant inflation, a post-pandemic trend the Fed did not see coming. This has prompted policymakers to return to the traditional way of fighting inflation by raising borrowing costs, even as this leads to higher unemployment and a recession.
The criticism is the first sign of declining political support for Powell, who was confirmed for a second term in the Senate in May by 80 votes. While he still enjoys the support of the White House and bipartisan respect, his efforts to slow the hiring process are likely to lead to more broadsides in the new Congress in the form of legislative proposals, oversight hearings and angry letters.
Powell’s critics say much of inflation is driven by factors outside the Fed’s control, such as supply chain problems, and point to signs that inflation is already starting to cool, as evidenced by the latest Consumer Price Index report. Progressives like Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) also blames corporations for taking advantage of the situation and driving up prices.
Warren recently led 10 other lawmakers in calling the Fed’s rate hikes “troubling” and demanding more explanations for them. Other Democrats, such as Brown, the Ohio Democrat who oversees the Fed as chairman of the Senate Banking Committee, and Sen. John Hickenlooper Colorado has also weighed in.
Powell is not backing down. While he and other Fed policymakers have indicated that future increases in borrowing costs will be more gradual as they gauge the impact on the economy, they also say rates still have a long way to go.
Top central bank policymakers say they are open to signs that inflation may cool without much impact on employment; for example, a key measure of employer compensation costs that the Fed specifically looks at shows that private sector wages are falling. But they are not convinced yet. Powell emphasized at his press conference in early November that he still believes the labor market is “imbalanced.”
For now, the market remains so strong that the demand for workers far outstrips the number of jobs. Powell says it will need to ease, which could mean anything from fewer jobs to massive layoffs, a message echoed by other Fed officials last week. More broadly, he argues that while job loss is painful for many families, inflation hurts everyone, especially lower-income people.
“I don’t think the Fed is aiming for a weaker labor market; it’s aimed at lower inflation,” said Jason Furman, a Harvard professor who served as President Barack Obama’s chief economist. “They say, if unemployment starts to rise, we’re still going to keep going.”
Conventional economic models suggest that lower unemployment and faster wage growth are tied to inflation, which led former Treasury Secretary Larry Summers to suggest that the unemployment rate would need to rise to 6 percent from 3.7 percent in October to adequately stem inflation.
Fed officials, meanwhile, said in September that they expect the rate hike to push unemployment to 4.4% by next year, which could mean more than a million job losses. But they are not aimed at a certain level of employment.
“We’re never going to say there are too many people working, but the bottom line is this: Inflation — what we’re hearing from people when we meet with them is that they’re really suffering from inflation,” Powell told reporters. time. “And if we’re going to sort ourselves out, really light the way to another period of very strong labor markets, we’ve got to put inflation behind us. I wish there was a painless way to do this. Are not.”
Therein lies the dilemma: What is the best way to reduce inflation if not through higher interest rates? The existing manual is not comprehensive.
Lindsay Owen, executive director of the progressive think tank Groundwork Collaborative, argued that the cost of reducing inflation by taxing so-called excess profits should be borne by opportunistic companies, not workers.
“We’ve seen more and more examples of companies talking about either they see their investment costs going down or they see a future where their investment costs will go down,” she said, referring to corporate earnings talks with shareholders. “And then move on to saying, ‘This is really good news because we’re going to keep our prices the same,’ or in some cases, saying, ‘We’re going to raise our prices.’
Skanda Amarnath, executive director of the worker advocacy group Employ America, said the Fed could also slow economic activity without trying to raise unemployment. The goal of aggressive government spending after the pandemic is to return the economy to pre-pandemic employment levels, he said. Now that the labor market has largely recovered, “we don’t need as much growth right now to keep employment high.”
“It’s a middle ground,” he said. “They just said it doesn’t exist, which is wrong and problematic.”
But many economists say it’s an open question whether the labor market itself will fall victim to the fight against inflation, or whether it could just be collateral damage.
“Can inflation return to [Fed’s] A 2 percent target given wage growth?” said Guy Berger, chief economist at LinkedIn. “Many leading economists and the Fed probably think no, because wage growth by itself and cost increases will put upward pressure on inflation.”
The problem, Furman said, is that the economy can’t produce enough to meet the demand for goods and services, and the result is inflation.
“Demand is still high, and so workers are encouraged to ask for bigger raises, and so companies are encouraged to ask for bigger price increases,” he said, with higher rates helping to dampen that. “It’s the only way we know how to get rid of inflation.”