"Jerome Powell is preparing to crash the economy days before the midterm elections, hurting workers and ushering his fellow Republicans into power"

 

Powell, a former longtime private equity executive and Republican donor, was first appointed Fed chair by President Donald Trump. He was re-nominated by Biden and confirmed in May with the support of all but six Democratic senators.

Under Powell’s leadership, the Fed has hiked interest rates five times this year. He has been transparent about the point of the increases: He wants to “get wages down” and “bring some pain to households and businesses,” with the idea being that this will help drive down prices.

There is no evidence that the rate hikes are doing much, if at all, to limit inflation. Indeed, corporate giants continue to report staggering profits, even as many other contributing factors to inflation have subsided.

The continued rate hikes could instead be a boon to Powell’s allies in corporate America, both by increasing unemployment and reducing the risk of unionization, and putting his fellow Republicans into power on Capitol Hill.

Polls show increasing frustration with a slowing economy, induced by Powell’s earlier rate hikes, and that voters whose biggest priority is the economy favor Republicans over Democrats by a two-to-one margin.

Powell’s rate hikes are “certainly bad news for the Democrats. If I were a Dem official, I would be very very unhappy with the Fed,” said J.W. Mason, a professor of economics at John Jay College. “I think people underestimate how political the Fed is. The administration probably does have some leverage if they chose to use it.”

The Federal Reserve has seven governors, all appointed by the president and confirmed by the Senate, with one designated by the president as chair and another as vice chair. The Fed pledges to aggressively seek to avoid political interference in its affairs, and as such, exercises very little transparency about what it does. Unlike essentially every other executive branch agency, official meetings of the board are closed to the public and transcripts are typically not released until five years after they are produced.

Despite the salience that the Fed’s actions have for the Democrats’ performance in the election on November 8, top Democrats have stayed mum, with the White House, House Speaker Nancy Pelosi (Calif.), and Senate Majority Leader Chuck Schumer (N.Y.) failing to return a request for comment.

High Interest Rates, Higher Pain

The Fed’s interest rate policy is effectively zero-sum: Higher interest rates equal more social pain and more economic contraction, and lower interest rates lead to easier credit and more employment.

This fact is almost never reported in corporate media, nor is the fact that higher mortgage costs are by definition inflationary. This is deliberate, because as prominent supporter of interest rate hikes and former top Obama economic aide Jason Furman noted to The Lever in July, if the choice was presented starkly, there would be effectively no political constituency pushing for higher interest rates.

“You’ll never hear someone from the Fed get up and say, we’re going to raise interest rates, that’s going to make it more costly to borrow,” Furman said on Lever Time. “That’s going to reduce business investments in our economy. And that’s the way we’re going to bring down inflation. And yet, that’s part of what they’re doing… if you start talking about how it works, I think it would sound bad to a lot of people.”

The Fed’s role in the economy is little understood. Effectively, the Fed determines the cost of lending for banks — not necessarily the interest rates the banks charge, but the interest rate banks receive from the central bank. Higher interest rates result in higher mortgage costs — but those higher costs are not factored into the way the Fed calculates inflation.

Whenever the Fed raises interest rates, the result will be more people out of work, because many sectors of the economy — and in particular, the home building and auto industries — are built on credit. The cheaper credit is, the more houses and cars will be built and sold.

The Fed’s actions suggest that the only inflation that really matters is workers’ real wages — not corporate profits, which have contributed about 40 percent to price growth since spring 2020, well above historical averages. Nor does the Fed meaningfully consider the growth of CEO pay, which grew 10 percent to an average of $14.4 million in 2021. The CEO-to-worker pay gap went from 181:1 in 2020 to 193:1 in 2021.

A central part of the problem facing Democrats — and likely why Pelosi and Schumer are silent about the Fed threatening their congressional majorities as rank and file Democrats speak up — is that all of the actual solutions to solving inflation, (or more precisely, corporate price gouging) run up against powerful corporate actors who pump money into the campaigns of their powerful Democratic allies in Washington.

The only comprehensive legislation proposed to address inflation was introduced by Rep. Jamaal Bowman (D-N.Y.) in August. The bill, which would investigate price gouging and make recommendations to the president for targeted price controls, has just 18 cosponsors. (The average bill has TKTK cosponsors.)

The recent 0.75 percent hike by the Fed on September 21 was their largest rate hike prior to an election since September 1980, when the Fed, under former Chase Manhattan Bank executive Paul Volcker, raised interest rates by 1 percent, followed by an additional 1 percent hike in October of that year.

That election resulted in Jimmy Carter losing 44 states to a man who was considered too extreme for the Republican Party nomination just four years before, and Republicans winning control of the Senate for the first time in 28 years.

The highlights of the Reagan years — the firing of 11,000 union air traffic controllers, the nuclear brinkmanship, the Wall Street craze and heightened inequality — can in many ways be attributed to the decisions made by Volcker and the Fed.

Powell referred to Volcker this spring as “the greatest economic public servant of the era.”

“The Fed prides itself on being an independent entity,” said Samir Sonti, a professor of urban studies at the City University of New York who is writing a book on the Fed. “It guards its independence very jealously. It’s clear that everything it does has political implications. That’s not lost on the very smart people who run the Federal Reserve. I’m not going to claim to know a political design by Jay Powell, but it seems to me that he must understand the potential political consequences of doing what he’s doing and when he’s doing it.”

He continued, “What’s so alarming is that a generally undemocratic institution has the ability to effect such significant harm on the global economy… If there’s anything that calls for democratic control and accountability, it is this.”

-Matthew Cunningham-Cook & Andrew Perez  THE LEVER