‘A Big Mistake’: Economists Warn Fed Rate Hikes Risk Plunging US Into Recession

The Fed’s move came on the heels of worse-than-expected federal data showing that inflation jumped 8.6% in May compared to a year earlier, prompting central bank officials to pursue more aggressive federal-funds rate increases, the Fed’s blunt tool to rein in consumer prices.

But progressive economists have argued for months that interest rate hikes—which are aimed primarily at slowing demand—are the wrong medicine for inflation driven in large part by skyrocketing gas prices and supply-chain disruptions caused by the pandemic.

With the Fed expected to continue pushing up rates at a similar pace in the coming months, analysts are growing increasingly concerned that the central bank will induce an economic slowdown and throw millions out of work in its bid to tackle inflation—a potential echo of the infamous Volcker shock of the 1980s.

Jerome Powell, the chair of the Federal Reserve, admitted as much during a press conference following the Federal Open Market Committee’s closed-door meeting on Wednesday.

“Lots of countries are looking at inflation of 10%, and it’s largely due to commodities prices,” said Powell, a Trump appointee renominated by President Joe Biden in November. “Gas prices—you know, all-time highs and things like that. That’s not something we can do something about.”

In a blog post on Wednesday, Reich stressed that “wages are lagging behind inflation.”

“A more accurate description of what we’re now seeing might be called ‘profit-price inflation’—prices driven upward by corporations seeking increased profits,” Reich argued, pointing to a recent analysis by the Economic Policy Institute showing that record-shattering corporate profits have been contributing disproportionately to inflation.

“I understand the Fed’s urgency, but it has entered dangerous territory,” Reich wrote. “If the Fed continues down this path—as it has signaled it will—the economy will be plunged into a recession. Every time over the last half-century the Fed has raised interest rates this much and this quickly, it has caused a recession.”

“A recession will be especially harmful to people who are most vulnerable to downturns in the economy—who are the first to be fired (and last to be hired again when the economy turns upward): lower-wage workers, disproportionately women and people of color,” he added. “The Fed is making a big mistake.”

“Ahead of the midterms, voters across the nation are eager to support candidates who embrace economic populism and prove to the American people that corporations are no longer above the law,” said Helen Brosnan, executive director of Fight Corporate Monopolies.