The Fed’s Response to Rising Inflation Protects the Wealthy at Workers’ Expense
The Federal Reserve has two broad areas of responsibility: one is with regard to monetary policy and the second involves financial regulatory policy, which includes both the monitoring and enforcement of financial regulations. When it fails to implement or enforce its regulations sufficiently, then it bails out the financial institutions and markets that have engaged in reckless behavior and are teetering on the edge. Here it is playing its role as “lender of last resort” or more accurately, as the “bailor-in-chief.” To bail out these banks and markets, the Fed tries to keep interest rates very low so they can borrow money cheaply. This also gives banks and wealthy financiers the opportunity to borrow money cheaply and buy and trade financial assets, leading to the massive increases in financial wealth we have observed until recently in the period following the great financial crisis of 2007-2009. Up until the time when Russia invaded Ukraine, the Federal Reserve’s mixture of monetary policy, regulatory (non-) policy and bail-outs led to a gigantic “asset inflation,” but not much of an inflation in the cost of goods and services. The one exception to this may have been in the case of housing and real estate, whose increase in prices were probably partly driven by these low interest rates.
But when supply chain problems from the pandemic hit and Russia’s invasion took hold, then commodity inflation took off. Now the Fed saw that its game of inflating the wealth of the wealthy with low interest rates and bailouts would no longer suffice. The problem: The accelerating inflation was harming the real value of wealth held by the top 1 percent and richer strata. The Fed responded by significantly raising interest rates to slow inflation and to try to protect the wealth of the wealthy. But as Bob Pollin explained, this came at the expense of slower employment growth and even higher unemployment for workers.