Fed's war on inflation poses moral dilemma as rate hikes threaten 2 million workers

The U.S. Federal Reserve Building in Washington is seen in this undated photo. Some authorities have suggested almost 2 million Americans could potentially lose their jobs impacted by anti-inflation policies of the Federal Reserve, adding a complicated financial and moral dynamic with respect to Catholic social teaching. (OSV News photo/Jason Reed, Reuters)

(OSV News) – As the U.S. recuperates from the unprecedented multiyear consequences of the COVID-19 pandemic – complicated by Russia's war on Ukraine and lingering supply chain issues – fiscal indicators point to future contraction for the nation's economy, if not eventual recession. Inflation also remains persistent, and interest rates for various kinds of debt have risen.

But the further suggestion by some authorities that almost 2 million Americans could potentially lose their jobs – impacted by inflation-fighting policies of the Federal Reserve – has added complicated financial and moral dynamics to the country's hoped-for recovery.

"This Federal Reserve Board does in fact take into consideration unemployment," said Daniel Finn, a professor of economics and theology at Minnesota's College of St. Benedict in St. Joseph and St. John's University in Collegeville. "It's an economic interpretation held by many economists – including the Federal Reserve Board – that the inflation we're experiencing today is not primarily caused by wages going up."

The Federal Reserve – the central bank of the United States, colloquially referred to as "the Fed" – is tasked with promoting effective operation of the nation's economy for the benefit of its citizens.

But Time magazine observed Feb. 9 that "the central bank is not your friend – and a growing number of economists are questioning whether its age-old approach to combating high inflation makes sense."

That historic approach – repeatedly increasing benchmark interest rates – is anchored in the policy conviction that a job market with strong hiring and increased wages results in higher inflation. In brief, the economic logic is this: Consumers with more income spend it – but companies paying higher wages may also raise their prices, resulting in inflation. But higher interest rates – and with them, larger interest payments – make loans more expensive for people and businesses. This typically slows both the economy and inflation, resulting in less business activity, less hiring and lower wages.

"Projections are just projections, and they are often more wrong than right," said Samuel Gregg, a distinguished fellow in political economy at the American Institute for Economic Research and an affiliate scholar at the Acton Institute.

"What I do know is that the inflation that raises prices for everyone, and disproportionately impacts the poor in negative ways, needs to be reduced," Gregg told OSV News. "Otherwise, the purchasing power of our money will continue to be eroded, and the value of salaries, incomes and wage increases will be diluted."

The solution is not without consequences. "To get inflation out of the monetary bloodstream means that the Fed has to raise interest rates. The side effect of that is an economic slowdown, perhaps even a recession, and possible job losses," Gregg said. "If there was a way to reduce inflation painlessly, I would tell you. But the reality is that no such way exists. That, however, is all the more reason why the inflation genie should never be let out of the bottle in the first place."

However, Finn is doubtful of the suggestion the Fed is intent upon putting people out of work to control inflation, noting that Fed Chairman Jerome Powell "has said publicly he doesn't really think that wages are the primary cause of our current inflation and thus he's not worried about wages pushing inflation."

"He doesn't have the view that we need to increase unemployment in order to reduce pressure on wages in order to reduce inflation," Finn said.

A terse exchange between Sen. Elizabeth Warren, D-Mass., and Powell during a March 7 hearing of the Senate Committee on Banking, Housing, and Urban Affairs, captured the interpretative disagreement.

Paraphrasing Powell's assessment that inflation makes everyone suffer – not simply Americans who might lose their jobs if the Fed prolongs what some judge a damaging strategic course – Warren asked rhetorically: "And putting 2 million out of work is just part of the cost, and they just have to bear it?"

Powell answered Warren's question with his own: "Well, will working people be better off if ... inflation remains 5%, 6%?"

The Fed's target inflation rate is 2% – but many economists say unemployment would have to reach 7.5% in order to achieve it. The current unemployment rate is 3.5%.

"The church has never stepped in and said one economic system is better than another," Finn explained. "It's always been 'here are the requirements that any economic system should live up to.' And this issue of unemployment is in fact one of the greatest criticisms of market economies, because it does leave decisions about employment largely in the hands of private firms."

Rather than preferencing specific economic systems, "Catholic social thought has said, 'Here are the criteria that every responsible person and every responsible government should be concerned about,'" Finn observed.

That said, Finn noted there historically has been "a definite conviction – based in the Scriptures; based in Jesus' words to us – that any responsible Christian has to be worried about economic life, and how it's treating others of our brothers and sisters."

Anthony Annett, a visiting scholar at Columbia University, former senior economist at the International Monetary Fund, and author of "Cathonomics: How Catholic Tradition Can Create a More Just Economy," warned those most likely to lose their jobs as the economy is tinkered with will be "low-wage workers, vulnerable workers, precarious workers, (and) minority workers."

"These are the people who are going to be hit first," he told OSV News.

In Annett's assessment, the Fed's attempt to control inflation could have both moral and financial fallout.

"I think this is a moral issue. Because yes – inflation is bad. It's bad for the poor; it's bad for people on fixed incomes. But unemployment is worse," he said. "If you don't have an income, you're in a much worse situation than if your prices are somewhat higher. So this is why I think that the Fed needs to stop right now – because it's getting too worrisome."

Annett agrees with Finn that current inflation is not necessarily attributable to higher wages; rather, the strange dynamics of the COVID-19 pandemic – supply chain disruptions, different consumer consumption patterns – and staggered reopening of the global economy are all root causes.

"You had a massive shift in demand, away from services and towards goods. And that made inflation go up," Annett said. "And if that's the main reason, hammering it back down with interest rate rises is not the way to do it. Because it will just kind of adjust on its own."

Annett emphasized, "The Fed actually has a dual mandate – it's to lower inflation, but it's also employment. You've got to balance it properly. And throwing one-and-a-half to two million people out of work – I don't think it's balancing it properly."

Ideally, Annett said, a free market and virtuous financial actors would guarantee both the public interest and a stable economy. But as recent banking crises have demonstrated, "that's really not enough. That doesn't guarantee you a respect for the common good, and for the integral development of every person."

Navigating a path that respects those twin concerns is the domain of Catholic social teaching.

"We don't like socialist collectivism. But we also don't like libertarian individualism," Annett said. "Pope Pius XI called that the twin rocks of shipwreck. You want to avoid both."



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