The Fed ices the labor market, D.C. stays mum
Inflation is an excuse for pushing down wages
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This week marked the final meeting of the Federal Reserve’s Open Market Committee for 2022, and like each of their last six meetings, the committee raised the central bank’s Federal Fund Rate -- the bedrock interest rate for the U.S. dollar economy.
Unlike the last four conclaves, however, Chairman Jerome Powell and company only raised the rate 0.5%, not 0.75%. Markets rallied hard in the leadup to the meeting, hoping that this signals an incoming “pivot” away from higher interest rates.
Conventional wisdom says that the Fed has no choice but to keep cranking up credit costs for everyone in order to slow down inflation. Read just a little more closely, however, and you’ll see that Powell has made his real priorities very clear: undermining workers’ bargaining position.
Lucky for him there is bipartisan consensus on the need to suppress the recent uptick in labor energy, with “progressive” voices embarrassingly ignorant of what’s really going on.
Powell gave markets a preview of the 0.5% rate move about two weeks ago in a speech at the liberal Brookings Institution think tank.
“The time for moderating the pace of rate increases may come as soon as the December meeting,” he said, leading stocks on a sharp rally that added more than 4% to the Nasdaq -- home to tech stocks most sensitive to interest rates.
But rates will continue to go up, just at a slower pace, Powell warned. “The labor market … shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation,” Mr. Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.”
“Rebalancing” is a euphemism; Powell got a bit more explicit later: “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market.”
We can put “moderation of labor demand growth” even more directly: the Fed thinks we need fewer jobs. The “promising developments” Powell mentioned apparently didn’t continue until that Friday, as markets slumped on bad news for Wall Street with the economy adding more jobs than expected in November.
This bears drawing out again: the Federal Reserve is openly calling for fewer jobs for U.S. workers with near zero debate about this approach among policymakers or the news media. Front pages rarely touch on the topic at all, while business pages repeat conventional wisdom about “overheated” labor markets, begging the question: hot for whom?
Workers have benefitted from what amounts to a seller’s market for labor. With nearly two job openings for every unemployed worker, employees who jump from one job to another saw an average 15% increase in their wages. This is significantly higher than official inflation rates, which means that as far as households go, inflation isn’t much of a problem as long as the job market stays “hot.”
Even those who didn’t change jobs saw a boost of 7.6%, higher than the Consumer Price Index (CPI): 7.1% -- on average, there is no inflation in real terms thanks to the “overheated” labor market. Of course, the government artificially underestimates CPI, so workers may in fact be losing ground, but fighting inflation by going after wages makes the problem worse, not better.
Why not instead make it a government priority to boost wage growth significantly above the inflation rate through strategic investment? Even easier, they could send money to working families to offset cost increases, perhaps by targeting the largest source of inflation so far -- housing costs.
Plenty of jobs, rising wages, falling costs -- this would mean a significant increase in living standards. As for how they’d pay for it, we know of one bucket of trillions nobody seems to mind if it goes missing…
Official discourse has ignored the Fed’s explicit anti-job campaign because conventional wisdom buys into the very concept used to define the job market as too hot, the “wage-price spiral.” Wage increases causing price bumps which force new demands for pay boosts can lead to “entrenched” out of control inflation, the theory goes.
But such spirals are a myth. The IMF found that on average prices tended to fall while nominal wages went up after an initial inflationary spike, the opposite of a spiral. Other research confirms that there is little evidence that wages can drive inflation to this extent, because labor is only one input into costs.
This is another point we ought to repeat: the central justification for the Fed’s intentional recession is empirically false. Yet they repeat the lie because the fantasy of a wage-price spiral is much more politically palatable than their true fear: a surging labor movement that could shift the balance of powers between capital and working people. The hot job market made it easier for workers to strike in record numbers in 2021 (relative to the “strike drought” following the union-busting that followed the last wave of inflation fighting at the Fed), with the first three quarters of 2022 seeing a 56% increase in union election petitions.
This is obviously anathema to Wall Street, the Fed’s true constituency, and Congress’ vote to break the rail workers' strike earlier this month shows that “left” and right in Washington are on the same page. They can hide behind the alibi of “central bank independence” and quietly enjoy fewer jobs, lower pay, union-busting, and a full-blown recession -- in a word, desperation. Their jobs are safe, after all.
It isn’t inflation that’s at risk from rising wages, but corporate profits. The Fed’s “dual mandate” of full employment and price stability can be read a different way: make everybody work for less. As the one man Trump and Biden can agree on, Jerome Powell has shown he understands his mission perfectly.
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