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Inflation hawks: The job killers at the Fed


Discussions of inflation and Federal Reserve Board policy take place primarily in the business media. That’s unfortunate, because these discussions can have more impact on the jobs and wages of most workers than almost any other policy imaginable.
The context of these discussions is that many economists, including some in policy making positions at the Fed, claim that the labor market is getting too tight. They argue this is leading to more rapid wage growth, which will cause more inflation and that this would be really bad news for the economy. Therefore they want the Fed to raise interest rates.
The part of this story that few people seem to grasp is that point of raising interest is to kill jobs. If that sounds like a bizarre accusation to make against responsible people in public life then you need to pick up an introductory economics text.
The story line there is that we get inflation if too many people are employed. There are all sorts of ways of making the story more complicated, and many people get PhDs in economics doing just that, but the basic point is a simple one: at lower rates of unemployment workers have more bargaining power and are therefore able to push up their wages.
If higher wages get passed on in higher prices then we see more inflation. If workers demand higher wages to compensate for higher prices then we will see still more inflation. Pretty soon inflation is jumping into the double-digits and then we have Zimbabwe-style hyper-inflation where our dollars become worthless.
The last part is only a modest exaggeration. The point is that the inflation hawks argue that we are on the edge of having a very serious problem with inflation and want the Fed to raise rates before it’s too late.
While the Fed cannot always boost the economy as much as it would like with lower interest rates and other policies, there is little doubt that it can slow the economy with higher interest rates. Higher interest rates will discourage people from buying homes or cars. It makes it harder to meet credit card debt payments and other loans obligations. Higher interest rates will also discourage investment. With less demand in the economy we will see less growth and fewer jobs.

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Tratto da rwer.wordpress.com