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The Debate Over Interest Rate Hikes

by WS Editors

Mar 16, 2022 | Opinion


The unfolding war on the Russian border. Lingering Covid disruptions. Runaway inflation. The news service Axios reports that when U.S. corporate leaders look ahead at 2022, they see minefields everywhere. “Uncertainty, which CEOs dread, abounds. Supply-chain snarls, labor shortages, inflation, rising pay and soaring demands for new benefits and work flexibility are driving up costs and complexity.”

There are other factors, from the CEO perspective. Many individuals are starting their own small businesses. Large numbers of employees are resigning, forcing companies to increase wages and benefits to attract replacements.

Soaring costs have inflicted pain. Morgan Stanley Wealth Management released a revealing data point recently—the year-over-year change in costs for S&P 500 companies is 13.4 percent, the highest it’s been in a decade.

There’ll be changes in the workplace to manage, too. Childcare centers are struggling to find trained staff, and with vaccine and mask mandates still in flux, firms will have to develop new models for managing employees who work from home.

Help, in the view of many business leaders, is on the way, as the monetarists at the Federal Reserve have indicated they will embark on a series of interest rate hikes meant to tame inflation as early as this coming March.

But while everyone wants to slow inflation, not everyone thinks that raising rates—and running the real risk of forcing the economy into recession—is the best way to combat the forces that are driving up costs and prices.

“A large across-the-board increase in interest rates is a cure worse than the disease,” Joseph Stiglitz, the Nobel laureate in economics and Columbia University professor, wrote recently in Project Syndicate. “We should not attack a supply-side problem by lowering demand and increasing unemployment. That might dampen inflation if it is taken far enough, but it will also ruin people’s lives.”

Nor is there agreement on the actual source of the problem. The economists at the Groundwork Collaborative see corporations more as the perpetrators than the victims of current economic distress. Corporate greed, they argue, has contributed to systemic supply chain failures and price increases.

“Decades of turning over the supply chains to a handful of mega-corporations created a brittle system that was ill-equipped to handle a crisis like the pandemic—resulting in bottlenecks and shortages and ultimately pushing prices up.”

Groundwork economists see no evidence to suggest wage increases for workers are driving current price spikes. What they do observe in their findings is that the same companies that are hiding behind the pandemic and supply chain disruptions as an excuse to gouge consumers are also preventing their workers from collectively bargaining for better pay, benefits, and treatment.

Robert Reich, the former secretary of labor in the Clinton administration, agrees. He writes:

Fed policymakers are poised to raise interest rates at their March meeting and then continue raising them, in order to slow the economy. They fear that a labor shortage is pushing up wages, which in turn are pushing up prices.

It’s a huge mistake. Higher interest rates will harm millions of workers who will be involuntarily drafted into the inflation fight by losing jobs or long-overdue pay raises. There’s no ‘labor shortage’ pushing up wages. There’s a shortage of good jobs paying adequate wages to support working families. Raising interest rates will worsen this shortage.

Slowing the economy won’t remedy either of the two real causes of today’s inflation—continuing worldwide bottlenecks in the supply of goods, and the ease with which big corporations (with record profits) are passing these costs to customers in higher prices.

Even Wall Street economists share Reich’s concerns. Dick Bove, the chief financial strategist at Odeon Capital Group and a regular contributor to Fox Business News, says the Fed is in a box. According to Bove, if it raises rates too sharply, the corresponding increase in the government’s cost of service on the growing debt could become unmanageable—or would at least place unwelcome pressure on government spending priorities. In Bove’s view, Powell has just been jawboning, hoping that by talking about shock therapy he’ll encourage the rates to rise at a more moderate pace by themselves, while everyone waits to see if the supply chain issues can be addressed and other inflationary pressures ease.

Stiglitz feels there are reasons for optimism that these goals can be achieved. He notes that December’s inflation numbers were half those of October. He sees the huge jump in energy costs as part of the pain inherent in the transition underway away from fossil fuels (as producers of traditional sources of energy are “reaping whatever returns they still can”). And he sees the rise in the price of used and new cars as a transitory factor.

Stiglitz’s prescriptions? Targeted structural and fiscal policies aimed at unblocking supply bottlenecks and helping people confront today’s realities. Indexed food stamps and fuel subsidies for the needy, and a one-time “inflation adjustment” tax cut for lower- and middle-income households, which could be financed by “taxing the monopoly rents of the oil, technology, pharmaceutical, and other corporate giants that made a killing from the crisis.”

Left unsaid are the election-year pressures to bring prices down and the opportunism that inevitably accompanies the partisan debate over pocketbook issues. The Fed meets on March 15 to 16, and we’ll find out whether the economy is on track to steer itself or if the central bank feels the need to take the wheel, and if so with how strong a grip.

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