The Federal Reserve continues to raise interest rates. Workers are affected by it | Robert Reich

On Friday in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell said the Fed should continue to do so. raise interest ratesalthough it would “bring some pain to families and businesses”.

This is – with all due respect – insane.

True, inflation is close to its highest level in four decades. But the Fed’s determined efforts to tame it with sharp interest rate increases – Fastest series of price hikes Since the early 1980s – increases the risk of recession. Powell’s comments suggest that the Fed may raise interest rates again in September by another three-quarters of a percent, raising the risks even more.

Pain was beginning to be felt all over the land. Wage gains have not kept pace with inflation. This means that most Americans continue to lose economic ground.

In fact, Powell tells them that they will lose more ground. He acknowledges that higher interest rates will slow economic growth and lead to “softer” labor market conditions – a euphemism for increases in lower wages and fewer jobs. But “these are the unfortunate costs of lowering inflation.”

In the meantime, though, corporate profits continued to rise. Profit margins are at their highest since 1950, according to Commerce Department figures Posted Thursday.

Take a moment and let your mind think about this: the prices companies charge their customers superiority Whatever the increasing costs companies face for materials and labor.

In other words, wages do not increase inflation. Production costs do not lead to higher inflation.

Businesses are pushing inflation up. The single largest source of inflation in the United States is corporate pricing power.

So why is the Federal Reserve raising interest rates? Because that’s what the Fed Do When prices go up. This is the only tool in the Fed’s toolkit. To quote the old saying, when all you have is a hammer, everything looks like a nail – or, in this case, an interest rate that must be raised.

The problem: this often burdens the working and low-income people with the fight against inflation. They are the first to lose their paychecks and their jobs as the economy slows. They have already been hit.

If the Fed continues to raise interest rates to slow inflation, they will take more hits.

This may be justified if firms invest their windfall profits in greater production capacity – adding factories, materials, warehouses, and jobs – which will increase their ability to meet future demand and thus better protect against inflation.

But they are not. They use their earnings to buy back their stock so that their stock values ​​don’t fall too much after already down due to the expected slowdown caused by the Fed.

At the start of the year, Goldman Sachs estimated that 2022 would see a record-breaking $1 trillion in buybacks. This is unlikely to happen, but buybacks continue at a strong pace. in the second quarter, Repurchases soared About 7% from the previous year.

Some economists argue that there is no reason to believe that firms will now exercise more pricing power than they have had all along. Why wait for material and labor costs to rise before increasing their profit margins?

The answer is simple. Inflation gives them cover. They can say – as many do now – that they have no choice but to raise prices in light of rising material and labor costs. They just don’t advertise the fact that their earnings are going up while they do.

Which brings us to the central question of policy: why can’t the burden of fighting inflation be put where it belongs – on the big companies that keep raising their prices in pursuit of higher profit margins and higher stock prices?

The simple answer is that big business has so much political clout that they would never allow the kinds of policies that might have that effect – eg, a windfall dividend tax, price controls, higher taxes on themselves and the wealthy, and bolder and more effective. Antitrust enforcement.

Although Democrats passed a 1% tax on stock buybacks in the recently enacted Inflation Cuts Act, they were unable to take these other steps. Not even a Democratic president and Democrats in control of both houses of Congress can overcome vested corporate interests.

So it’s all up to Jerome Powell and the Fed. Which means it’s all about working people.

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