Washington (US), June 29: The U.S. Federal Reserve is scrambling to tamp down inflation via the most powerful interest rate hikes in decades, which are likely to increase unemployment and the cost of borrowing, and both could disproportionately harm the working class and lower-income Americans, according to some economists.
The central bank hiked rates earlier this month by 75 basis points, which was the largest increase since 1994, amid skyrocketing inflation, especially soaring food and gasoline prices.
In an op-ed in The Guardian, Robert Reich, a former U.S. labor secretary, argued that higher interest rates will "harm millions of workers" who will lose jobs or long-overdue pay raises.
Clara Mattei, economics professor at The New School for Social Research, in an op-ed in The Guardian, noted that the Fed's rate hikes will boost the cost of borrowing money. That will benefit creditors, but households with high debt will have bigger bills.
The cost of social services will also increase, forcing some states to slash their budgets. That will hurt low-income folks who rely on those services, Mattei argued.
"While high inflation has been a cruel tax on all Americans, it has been a particularly cruel tax on the most vulnerable members of society," Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.
Last year, the Fed's ultra-easy monetary policy, at a time when the economy was receiving its largest-ever peacetime stimulus and was recovering strongly, led to an inflation surge not seen in 40 years, Lachman said.
Noting that now the Fed must slam on the monetary policy brakes to bring inflation under control, Lachman said this is all too likely to involve a recession and a rise in unemployment, which will fall hardest on the most vulnerable members of society, who will be the first to be fired.
This could have been avoided if the White House had run a "less irresponsible" fiscal policy and if the Fed had not been so late in its tightening of monetary policy, Lachman said.
Brookings Institution Senior Fellow Barry Bosworth told Xinhua that any policy that slows economic growth and employment has disproportionate negative effects on the poor and marginal workers.
However, so does inflation, Bosworth noted.
An increase in supply, such as for energy, would reduce inflation pressures, but it may have negative environmental effects and is hard to achieve in the short run, Bosworth said.
The negative effects of monetary restraint should give added impetus to efforts to expand less-polluting supplies of energy, but the short-term gains are limited, Bosworth said.
Still, to urge the central bank not to act at all seems counterproductive, Bosworth said.
Dean Baker, senior economist at the Center for Economic and Policy Research, told Xinhua the most important impact of the rate hikes is on the housing market.
House prices rose 30 percent over the last two years. That was unsustainable, and the rate hikes brought this to a stop, Baker said.
Low-paid workers have been getting the highest pay increases in the last two years, but if unemployment rises much (due to rate hikes), this will no longer be true, Baker said.
Meanwhile, rate hikes could spell trouble for Democrats in November's midterm elections.
Brookings Institution Senior Fellow Darrell West told Xinhua that rising interest rates will be a problem for Democrats in November because they "sour the public mood and harm working class voters."
The question is how long rates will need to stay high or whether this is a temporary phenomenon. If inflation starts to move down, that would reduce the negative political impact for Democrats, West said.
Source: Xinhua