Senator Elizabeth Warren released harsh criticism from the Federal Reserve on Sunday over the news that it would raise interest rates to fight inflation.
Warren made a statement via a tweet containing a link from CBS News saying the Fed “plans to increase unemployment sharply.” The article follows a statement by Federal Reserve chairman Jerome Powell on Wednesday about the central bank’s rate hike plan, which he admitted is likely to “ease labor market conditions”. This was interpreted as an increase in unemployment.
“The Fed Chair Powell appears determined to plunge the economy down into the abyss – even after it has admitted that rate hikes will not bring down key prices,” Warren tweeted in response to the Powell article. “Destroying jobs and crushing the wages of millions of workers is reckless and dangerous. Recession is not a solution to inflation.
A CBS News article reported that the Federal Reserve forecasts the US unemployment rate to hit 4.4 percent. in 2023, compared to the current 3.7 percent. This would result in approximately 1.2 million people losing their jobs in an effort to bring down inflation.
“I wish there wasn’t a painless way to do that,” Powell said Wednesday. – There isn’t.
The Fed’s purported quest for unemployment to fight inflation is based on the theory that with a few million workers unemployed, they would be forced to curb their spending habits and wage growth would stall. If firms assume labor costs are not rising, they can theoretically stop raising the prices of their goods, slowing inflation down.
Some economists, however, doubt that this plan is necessary at the moment. Ian Shepherdson, chief economist at Pantheon Macroeconomics, predicted in a recent report that prices would fall in 2023 as global supply chains normalized. He also added that it is “unclear” why the Fed would risk increasing unemployment to fight inflation if it was to fall shortly anyway.
Claudia Sahm, an economist who previously worked with the Federal Reserve, also criticized the move in Thursday’s tweet, noting that the similarity in inflation rates between the US and Germany indicates that the problem is supply-side driven and the weakening labor market’s drive to drop inflation faster would only be temporary solution.
“Much of US inflation (chart) and a very large part of inflation in Germany are due to supply factors,” Sahm tweeted. “With sufficient demand destruction, central banks can now lower inflation, but only temporarily and with great pain. Why are you doing this?”
Newsweek contacted Warren’s office for comment.
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