galbraith19_BRENDAN SMIALOWSKIPOOLAFP via Getty Images_jerome powell BRENDAN SMIALOWSKIPOOLAFP via Getty Images

The Fed's Target Is Workers

By announcing forthcoming interest-rate hikes at a time when total US employment is still below its 2019 level, the Federal Reserve is once again bending to pressure from economists and financiers. Whether or not it understands what it is doing, its war on "inflation" is really a war on American workers.

STEAMBOAT SPRINGS, COLORADO – 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 (on federal funds and treasury bills) by at least 200 basis points by the end of 2024. Thus, Powell yielded to pressure from economists and financiers, resurrecting a playbook that the Fed has followed for 50 years – and that should have remained in its vault.

The stated reason for tightening monetary policy is to “fight inflation.” But interest-rate hikes will do nothing to counteract inflation in the short run 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%, unemployment reached 10%, and Latin America spiraled into a debt crisis that nearly took down all the large New York banks. By the end of 1982, the Fed had backed off.

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