Earlier this week, Senator Elizabeth Warren pushed Fed Chair Jay Powell on what he would say to the two million workers the Fed expects will lose their jobs to get inflation down. It was a testy exchange. Powell’s frustration was fair, as was Warren’s.
As sophisticated and flexible as the U.S. financial system is compared to any other advanced economy, how is it we can’t figure out a way for the upper 1% to share the pain? The working class can’t afford to employ an army of lobbyists on K Street.
Good post. I watched Powell on both days. The Fed is stuck whatever they do or don’t do. They did not cause the war, create Covid or pump more trillions into the economy( they did buy bonds though ). But they are stuck with the job of bringing down inflation. I was in my late 20s in the early 80s and remember paying up 20 percent interest on some loans. Go back and look at unemployment rates in the 70s and 80s. They were very volatile. They were not fun times. Two things to add. We normally allow 800,000 legal immigrants a year to enter the country. Covid messed this up. I think the number was 100,000 a year for 2020 and 2021. From this I think that the unemployment number is artificially low and causes wages on the low end to go up (inflationary). And the Government is still backed up in this area. The other is that the expanded food stamp money is expiring. Congress should not let this happen especially if we are going to have more out of work. People have to eat.
Throw the working class under the bus is the way of the world. This time, just when they’re experiencing real wages increases for the first time in 40 years, throw them out of their jobs. Golly, during the pandemic they were “heroes” and “essential workers.” Disgusting.
The Fed acts with the only hammer it has in the absence of a responsible and effective national government, lacking an industrial policy, allowing monopolies in many sectors and allowing years of Fed flamboyance with money supply fueling a disruptive financial sector.
The Federal Job guarantee, fixing immigration along with the green new deal are policies that could go a long away for Americans overtime but sadly in this feckless two party system we'll likely never going to see it and its a real shame. So yeah, congress can step up but again don't expect it. Another thing about rate hikes, it actually doesn't slow demand it actually boosts it due to all that interest income that's being poured into the economy which is helping those who are better off. Yeah, the fed has a blunt tool, but that tool isn't working.
Mar 11, 2023·edited Mar 11, 2023Liked by Claudia Sahm
Referring to Fed Chair Jay Powell’s appearance before Congress a few days ago, Claudia gives an interesting and probably accurate response to this question: “What could Fed Chair Jay Powell say to the 2 million people likely to be unemployed [by interest rate hikes]?” Here is my take on what Jay Powell should say (if he were honest).
Why do we have to lose our jobs due to interest rate hikes?
It’s like buying tickets to a lottery. Not everyone will lose their jobs but some people will, namely, those who lost the lottery. It’s necessary for a couple million people to lose this lottery if we want to stabilize the economy. Raising interest rates is a slick way to accomplish this without us having to name specific people or jobs that will be eliminated. Seems weird that we can get people fired from their jobs if we raise interest rates, but if we tried to tell a particular person that they were fired, not because they were doing anything wrong, but so that someday we could have a better economy, we would never get away with it.
How sure are you that you can stabilize the economy by raising interest rates?
Quote from Claudia: “We will stop as soon as inflation is under control. And not before.” Claudia is wrong. We will stop when we cause enough pain to enough people and create such an uproar that Congress or wealthy people who happen to be losing money will tell us to tone it down.
When will the jobs come back?
In a few years, when we’re finally forced to stop raising interest rates, some jobs will come back, but now there will be more people looking for fewer jobs at lower wages, so your chances of getting your job back at the same salary as when you were fired is essentially zero. If you’re lucky, you’ll get a lower paying job with worse working conditions than what you had before. If you’re unlucky, you’ll be sleeping under a bridge somewhere.
So will I at least pay less at the grocery store?
You can sleep well at night knowing that a loaf of bread now costs $5 instead of $5.25.
Why is 2% inflation worth 2 million jobs?
Beats me. I’m an investment banker and a lawyer, not an economist. I like to quote this line. “As one judge said to another, ‘Be just. And if you can’t be just, be arbitrary.’”
In closing
We’ll rise above this somehow. Even if you lose your job, Americans are famous for their resilience and innovative spirit. For example, a few days ago Arkansas Governor Sarah Huckabee Sanders passed a law loosening child labor protections. If you can’t get your job back, you can always move to Arkansas and put your kids to work in a meat packing factory.
I understand the limited tools that the Fed has, but it does seem like they take the stable prices part of their mandate much more seriously than their mandate to promote maximum employment.
Where in the Fed models is the impact of the fiscal stimulus they're creating by additional federal interest payments, to the tune of an additional hundreds of billions of dollars into the economy?
Wouldn't that spending better serve the public by going to these being forced into unemployment than existing Treasury bond and note holders?
Rough calculation it's an additional $600 billion/year the Fed Reserve is forcing the Federal government to put INTO the economy. Isn't that inflationary?
Thank you for this, it's in line with what i've been hearing and it's good to hear you're on the same page. Also, in that video Powell mentions "Alan Blinder wrote a book on this" so now I've got another book in my que, which I appreciate :)
Oops! It looks like Fed Chair Powell has more people to answer to than just the 2 million who will lose their jobs (along with the millions who can’t afford to buy a house or a car due to high interest rates). Now, it’s everyone who had money in Silicon Valley Bank. This is an unintended consequence only to those who didn’t do their homework. Watching Senator Warren’s exchange with Powell was a cringeworthy event. For example, Powell simply couldn’t answer Senator Warren’s question about how he was prepared to deal with a possible “runaway train”, which is just another term for a cascade of unintended consequences. It looks like the runaway train is starting to gain steam. Powell is clearly not qualified to be Fed Chair. At one point in their testy exchange, Powell said to Senator Warren, “What do you want us to do, walk away from our jobs?” The answer is a resounding YES!
Flush with cash from high-flying start-ups, Silicon Valley Bank bought huge amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
That had worked well until the Federal Reserve began raising interest rates last year to cool inflation."
What about the part of the discussion in which you explain that much of inflation is related to pent up pandemic demand and Ukraine related effects and may come to be affected by China reopening and near shoring. None of these are within the Fed’s purview; and yet they act and Congress does not.
If every person who loses their job to the Fed’s action was compensated 100% there would be no problem. They would sit at home searching for a new job and experience no financial damage. It would make the Fed’s job more difficult and the administration would be telling them, find a different way.
Instead of attacking the demand side (consumers) why not browbeat the supply side (business). Force business to prove why they are raising prices. For example, Wegmans Food Market raised bagels to $7.50 for 6. I went in today and it’s $7.75. Really? I think business is being opportunists and may be subtly colluding in their pricing policies.
Likewise, landlords are notoriously raising rents even though their input costs remain the same.
If any price increases are originating outside the country the administration should hammer that country (we know Trump would do this).
Legitimate increases will be allowed. “I have to pay $4.50/gallon for Diesel!” Ok. That’s our fault. The administration has to do more; attack the reasons for inflation.
The Fed now has the tools of the Joker’s doctor in the movie Batman, crude and barbaric. It is the most primordial method of solving this problem.
"Congress has more tools and could do more to spread the pain."
I hope that in upcoming posts you discuss those tools and whether they are capable of doing more than just spreading pain around more evenly.
How about some fiscal policy and structural policy responses to excess demand and insufficient supply.
As sophisticated and flexible as the U.S. financial system is compared to any other advanced economy, how is it we can’t figure out a way for the upper 1% to share the pain? The working class can’t afford to employ an army of lobbyists on K Street.
Good post. I watched Powell on both days. The Fed is stuck whatever they do or don’t do. They did not cause the war, create Covid or pump more trillions into the economy( they did buy bonds though ). But they are stuck with the job of bringing down inflation. I was in my late 20s in the early 80s and remember paying up 20 percent interest on some loans. Go back and look at unemployment rates in the 70s and 80s. They were very volatile. They were not fun times. Two things to add. We normally allow 800,000 legal immigrants a year to enter the country. Covid messed this up. I think the number was 100,000 a year for 2020 and 2021. From this I think that the unemployment number is artificially low and causes wages on the low end to go up (inflationary). And the Government is still backed up in this area. The other is that the expanded food stamp money is expiring. Congress should not let this happen especially if we are going to have more out of work. People have to eat.
Throw the working class under the bus is the way of the world. This time, just when they’re experiencing real wages increases for the first time in 40 years, throw them out of their jobs. Golly, during the pandemic they were “heroes” and “essential workers.” Disgusting.
The Fed acts with the only hammer it has in the absence of a responsible and effective national government, lacking an industrial policy, allowing monopolies in many sectors and allowing years of Fed flamboyance with money supply fueling a disruptive financial sector.
The Federal Job guarantee, fixing immigration along with the green new deal are policies that could go a long away for Americans overtime but sadly in this feckless two party system we'll likely never going to see it and its a real shame. So yeah, congress can step up but again don't expect it. Another thing about rate hikes, it actually doesn't slow demand it actually boosts it due to all that interest income that's being poured into the economy which is helping those who are better off. Yeah, the fed has a blunt tool, but that tool isn't working.
Referring to Fed Chair Jay Powell’s appearance before Congress a few days ago, Claudia gives an interesting and probably accurate response to this question: “What could Fed Chair Jay Powell say to the 2 million people likely to be unemployed [by interest rate hikes]?” Here is my take on what Jay Powell should say (if he were honest).
Why do we have to lose our jobs due to interest rate hikes?
It’s like buying tickets to a lottery. Not everyone will lose their jobs but some people will, namely, those who lost the lottery. It’s necessary for a couple million people to lose this lottery if we want to stabilize the economy. Raising interest rates is a slick way to accomplish this without us having to name specific people or jobs that will be eliminated. Seems weird that we can get people fired from their jobs if we raise interest rates, but if we tried to tell a particular person that they were fired, not because they were doing anything wrong, but so that someday we could have a better economy, we would never get away with it.
How sure are you that you can stabilize the economy by raising interest rates?
Quote from Claudia: “We will stop as soon as inflation is under control. And not before.” Claudia is wrong. We will stop when we cause enough pain to enough people and create such an uproar that Congress or wealthy people who happen to be losing money will tell us to tone it down.
When will the jobs come back?
In a few years, when we’re finally forced to stop raising interest rates, some jobs will come back, but now there will be more people looking for fewer jobs at lower wages, so your chances of getting your job back at the same salary as when you were fired is essentially zero. If you’re lucky, you’ll get a lower paying job with worse working conditions than what you had before. If you’re unlucky, you’ll be sleeping under a bridge somewhere.
So will I at least pay less at the grocery store?
You can sleep well at night knowing that a loaf of bread now costs $5 instead of $5.25.
Why is 2% inflation worth 2 million jobs?
Beats me. I’m an investment banker and a lawyer, not an economist. I like to quote this line. “As one judge said to another, ‘Be just. And if you can’t be just, be arbitrary.’”
In closing
We’ll rise above this somehow. Even if you lose your job, Americans are famous for their resilience and innovative spirit. For example, a few days ago Arkansas Governor Sarah Huckabee Sanders passed a law loosening child labor protections. If you can’t get your job back, you can always move to Arkansas and put your kids to work in a meat packing factory.
Ms. Sahm: You likely know most, if not all, of this. Nevertheless:
https://www.generalist.com/briefing/substack
I understand the limited tools that the Fed has, but it does seem like they take the stable prices part of their mandate much more seriously than their mandate to promote maximum employment.
Where in the Fed models is the impact of the fiscal stimulus they're creating by additional federal interest payments, to the tune of an additional hundreds of billions of dollars into the economy?
Wouldn't that spending better serve the public by going to these being forced into unemployment than existing Treasury bond and note holders?
Rough calculation it's an additional $600 billion/year the Fed Reserve is forcing the Federal government to put INTO the economy. Isn't that inflationary?
Thank you for this, it's in line with what i've been hearing and it's good to hear you're on the same page. Also, in that video Powell mentions "Alan Blinder wrote a book on this" so now I've got another book in my que, which I appreciate :)
Oops! It looks like Fed Chair Powell has more people to answer to than just the 2 million who will lose their jobs (along with the millions who can’t afford to buy a house or a car due to high interest rates). Now, it’s everyone who had money in Silicon Valley Bank. This is an unintended consequence only to those who didn’t do their homework. Watching Senator Warren’s exchange with Powell was a cringeworthy event. For example, Powell simply couldn’t answer Senator Warren’s question about how he was prepared to deal with a possible “runaway train”, which is just another term for a cascade of unintended consequences. It looks like the runaway train is starting to gain steam. Powell is clearly not qualified to be Fed Chair. At one point in their testy exchange, Powell said to Senator Warren, “What do you want us to do, walk away from our jobs?” The answer is a resounding YES!
Silicon Valley Bank Collapse: What We Know
| Regulators shut down Silicon Valley Bank on Friday, in the largest U.S. bank failure since the 2008 financial crisis, and appointed the Federal Deposit Insurance Corporation as the receiver. https://www.nytimes.com/2023/03/10/business/svb-silicon-valley-bank-explainer.html "Bank was caught by higher interest rates.
Flush with cash from high-flying start-ups, Silicon Valley Bank bought huge amounts of bonds more than a year ago. Like other banks, Silicon Valley Bank kept a small amount of the deposits on hand and invested the rest with the hope of earning a return.
That had worked well until the Federal Reserve began raising interest rates last year to cool inflation."
What about the part of the discussion in which you explain that much of inflation is related to pent up pandemic demand and Ukraine related effects and may come to be affected by China reopening and near shoring. None of these are within the Fed’s purview; and yet they act and Congress does not.
If every person who loses their job to the Fed’s action was compensated 100% there would be no problem. They would sit at home searching for a new job and experience no financial damage. It would make the Fed’s job more difficult and the administration would be telling them, find a different way.
Instead of attacking the demand side (consumers) why not browbeat the supply side (business). Force business to prove why they are raising prices. For example, Wegmans Food Market raised bagels to $7.50 for 6. I went in today and it’s $7.75. Really? I think business is being opportunists and may be subtly colluding in their pricing policies.
Likewise, landlords are notoriously raising rents even though their input costs remain the same.
If any price increases are originating outside the country the administration should hammer that country (we know Trump would do this).
Legitimate increases will be allowed. “I have to pay $4.50/gallon for Diesel!” Ok. That’s our fault. The administration has to do more; attack the reasons for inflation.
The Fed now has the tools of the Joker’s doctor in the movie Batman, crude and barbaric. It is the most primordial method of solving this problem.