ហេតុអ្វីបានជាកម្មករអាមេរិក និងប្រាក់ឈ្នួលរបស់ពួកគេគឺជាគោលដៅពិតប្រាកដនៅក្នុងសង្គ្រាមរបស់ Fed ស្តីពីអតិផរណា

The Federal Reserve’s planned interest rate increases show it has bowed to pressure from economists and financiers

Whether it is intentional or not, the US central bank’s war on inflation will in reality be a war on American workers and their interests

US Federal Reserve chair Jerome Powell has now committed to putting US monetary policy on a course of rising interest rates, which could boost the short-term rate by at least 200 basis points by the end of 2024. Thus, Powell yielded to pressure from economists and financiers, resurrecting a playbook the Fed has followed for 50 years – one that should have remained in the vault.

The stated reason for tightening monetary policy is to fight inflation. But interest rate increases will do nothing to counteract inflation in the short term and will work against price increases in the long run only by bringing on yet another economic crash.

Behind the policy is a mysterious theory linking interest rates to the money supply, and the money supply to the price level. This “monetarist” theory goes unstated these days for good reason: it was largely abandoned 40 years ago after it contributed to a financial debacle.

In the late 1970s, monetarists promised that if the Fed would focus only on controlling the supply of money, inflation could be tamed without increasing unemployment. In 1981, Fed chair Paul Volcker gave it a try.

Short-term interest rates soared to 20 per cent, unemployment reached 10 per cent and Latin America spiralled into a debt crisis that nearly took down all the large New York banks. By the end of 1982, the Fed had backed off.

Since then, there has been almost no inflation to fight, owing to low global commodity prices and the rise of China. But the Fed has periodically shadowboxed with “inflation expectations” – raising rates over time to pre-empt the invisible demons and congratulating itself when none appeared.

The shadowboxing also ends badly. Once borrowers know rates are going up over time, they tend to load up on cheap debt. This fuels speculative booms in real assets such as land and fake assets including internet start-ups, subprime mortgages and cryptocurrencies.

Meanwhile, long-term interest rates remain unmoved and the yield curve flattens or even becomes inverted, eventually causing credit markets and the economy to fail. We are likely to see this feedback loop once again.

Of course, this time is different in one respect. For the first time in decades, prices are rising. This new phase was kicked off a year ago by a surge in oil prices, followed by rising prices for used cars as the semiconductor supply chain snarled automobile production. We are also seeing rising land prices, which feeds into estimates of housing costs.

Inflation rates are reported on a 12-month basis, so any shock is guaranteed to generate headlines for 11 more months – a boon for the inflation hawks. But since oil prices in December were about the same as they were in July, the initial shock will be out of the data in a few months and the inflation reports will change.

The effect of more expensive energy will continue to percolate through the system. Whenever there is a structural change such as an increase in energy costs or reshoring parts of the supply chain, inflation is inevitable and necessary.

Other prices must fall to hold average price increases to the previous target, and that generally doesn’t happen. The economy adjusts through a rise in average prices, and this must continue until the adjustment is finished.

By reacting now, the Fed is saying it would like to force down some prices to offset rising energy and supply chain costs, thereby pushing the average inflation rate back down to its 2 per cent target as quickly as possible. Assuming the Fed understands this is what it is doing, what prices does it have in mind? What else is there but wages?

Powell said the United States has a “tremendously strong labour market”. Citing the ratio of job openings against “quits”, he said too few workers were chasing too many jobs.

Why would that be? Considering the US economy is still several million jobs below pre-pandemic employment levels, it seems many workers are refusing to go back to crummy jobs with lousy pay. As long as they have some reserves and can hold out for better terms, they will.

As wages rise to bring back workers, and because most jobs nowadays are in services, higher-income people who buy more services will have to pay more to lower-income people who provide them. This is the essence of “inflation” in a services economy.

Prices of energy and most goods are set worldwide, so service wages are the only part of the price structure the Fed’s new policy can affect directly. The only way the policy can work is by making working Americans desperate.

The takeaway for American workers: the Fed is not your friend. Neither is any politician who declares, as US President Joe Biden did last month, that “inflation is the Fed’s job”.

James K. Galbraith, chair in government/business relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, is a former executive director of the congressional Joint Economic Committee. Copyright: Project Syndicate

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