It’s the biggest single rate increase since Bill Clinton was president. But will it help?
The cost of goods has gone up faster than at nearly any point in the last 40 years. So an aggressive Federal Reserve — America’s central bank — hiked interest rates .75%on Wednesday, the biggest single rate increase since the mid-1990s.
But what does that interest rate hike really mean?
Inflation measures the supply and purchasing power of money. So, as the theory goes, if the Federal Reserve makes it more expensive to borrow money, fewer people will borrow money to make purchases. Demand will drop and demand for goods and services will fall, leading to a decrease in prices.
At some point, theoretically, that means the price of your groceries will flatten out or drop.
“We want to see progress. Inflation can’t go down until it flattens out,” Federal Reserve Chairman Jerome Powell said at a press conference, according to CNBC. “If we don’t see progress … that could cause us to react. Soon enough, we will be seeing some progress.”
What Does This Mean for Wages?
There are two major trends occurring in the economy and they are somewhat at odds with one another. Workers have significant bargaining power at the moment, with more employees able to demand better wages and benefits than at any time in recent history. Employers have responded by increasing wages and benefits.
But, of course, with the cost of goods going up, those increased wages don’t buy as much as they did even a year or two ago.
Is inflation to blame for why everything is so expensive? It won’t surprise you that experts and economists disagree.
There’s no doubt that the price of gas, groceries, furniture and other goods has been eye-popping recently. But the causes are myriad: the war in Ukraine, pandemic-related demand and supply chain issues are among the biggest reasons. There is also evidence that big companies have seen increased demand as an opportunity, as profits for big companies have soared in recent months, leading to accusations of price-gouging.
With that in mind, that’s why many aren’t so sure that the central bank’s actions will help. There’s also a fierce debate about whether the bank will hurt workers in the process.
“Raising costs of borrowed money will do nothing to ease the supply chain crisis, nor moderate the shortage of affordable housing that leads landlords to raise rents. In fact, it will worsen inflation by translating into more costly mortgages, car loans, and credit card purchases,” the American Prospect argued.
The publication Jacobin seized on Powell’s recent comments to show that the real point to the inflation hike is to put employers — i.e. big corporations — back in the driver’s seat. “If workers have fewer options for jobs, they are more likely to accept lower wage work and less likely to form unions,” the publication argued.
Powell has indicated that part of the plan is to “get wages down,” as he put it, to help bring the cost of goods down.
“It’s not going to be easy,” he said at a May press conference, according to the Wall Street Journal. “And it may well depend, of course, on events that are not under our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do.”