Home Federal Reserve Critics Warn Another Fed Rate Hike Would Be the ‘Straw That Breaks...

Critics Warn Another Fed Rate Hike Would Be the ‘Straw That Breaks the Camel’s Back’ – Jake Johnson

Official portrait of Governor Jerome H. Powell. Mr. Powell took office on May 25, 2012, to fill an unexpired term ending January 31, 2014. For more information, visit http://www.federalreserve.gov/aboutthefed/bios/board/powell.htm

Federal Reserve policymakers convened Tuesday for a two-day meeting that will culminate in a decision with major implications for the U.S. and global economies, which have been jarred by recent banking sector chaos and growing fears of a broader financial crisis.

The Fed is widely, though not universally, expected to raise interest rates by 25 basis points on Wednesday despite concerns that the central bank’s tightening of monetary policy over the past year is at least partially responsible for the collapse of Silicon Valley Bank (SVB), a top lender to tech startups and venture capital firms.

Rakeen Mabud, chief economist at the Groundwork Collaborative, warned Tuesday that another rate increase would be a huge mistake with potentially devastating consequences that will fall most heavily on vulnerable workers.

The Fed’s own projections indicate that millions of additional U.S. workers could face unemployment by the end of the year as the central bank continues to raise borrowing costs and tamp down economic demand.

“While the Federal Reserve wasted no time protecting wealthy venture capitalists and startup CEOs last weekend, it has shown little concern for the millions of people who could lose their jobs as a result of its aggressive rate hikes,” said Mabud, who argued another rate hike would “be the straw that breaks the camel’s back, sending our economy into a painful—and completely avoidable—recession.”

“After the SVB fiasco,” Mabud added, Fed Chair Jerome Powell “should not touch rate hikes with a ten-foot pole.”

Josh Bivens, chief economist at the Economic Policy Institute, also called for a pause, arguing Monday that the case for halting rate hikes was clear even before SVB failed earlier this month, given recent signs that inflation and wages are cooling substantially.

“It is a genuine problem that interest rate hikes of nearly 5% in a year cause this much distress in the financial sector, indicating a clear failure of bank management and supervision,” wrote Bivens, who noted that banks typically benefit from higher interest rates.

“These failures should be addressed going forward,” Bivens continued. “But they exist today and the fallout of them clearly provides another argument for standing pat on further rate increases.”

“Higher rates reduce inflation only by creating financial crises that crash the economy.”

The Fed’s policy meeting comes as it is facing mounting criticism over its role in the collapse of SVB and Signature Bank, with lawmakers and experts pointing to the central bank’s rollback of post-financial crisis regulations that imposed tougher liquidity requirements on financial institutions with between $50 billion and $250 billion in assets.

“The Federal Reserve is irreparably broken and can no longer be trusted to go it alone on monetary policy,” Lindsay Owens, the executive director of the Groundwork Collaborative, said last week. “As Congress works to re-regulate mid-size banks after the misguided 2018 rollbacks… they should also address the rot at the Fed.”

In concert with the U.S. Treasury Department and other central banks, the Fed has worked to stem the fallout from the recent bank failures by launching liquidity operations and new lending programs aimed at backstopping the financial industry at home and abroad.

But experts have cautioned that the Fed’s efforts to shore up the banking system will be undermined by further interest rate increases, which have proven to be a destabilizing force.

“The Fed has never managed to engineer a soft landing,” Yeva Nersisyan, associate professor of economics at Franklin & Marshall College, and L. Randall Wray, professor of economics and senior scholar at the Levy Economics Institute of Bard College, wrote in an op-ed for The Hill late last week.

“The reason is simple: higher rates reduce inflation only by creating financial crises that crash the economy,” Nersisyan and Wray explained. “After more than a decade of near-zero interest rates, the Fed hiked rates extremely quickly—by 400 basis points (4 percentage points). All balance sheets that had been built during the period of low rates immediately became toxic.”

“What is missing from the debates over monetary policy today is the understanding that the Fed was not established to control inflation,” they continued. “It was created to prevent financial crises by acting as a lender of last resort in times of distress. Indeed, that’s exactly what the Fed is doing now—opening up its lending facilities to banks in need. But rather than focus on maintaining financial stability, the Fed has become obsessed with controlling inflation, something it cannot really do without causing either a recession or a financial crisis (or both).”

“Put on the crash helmets,” the pair concluded. “It’s going to be a bumpy landing.”