Larry Summers and other corporate apologists asserted for over a year that the Federal Reserve would have to engineer a recession to bring down prices. But as inflation continues to fall with no corresponding rise in unemployment, doomsayers’ insistence on the need to throw millions of people out of work to restore price stability has been discredited. Although the United States is on track to achieve a soft landing once thought improbable, don’t give Fed Chair Jerome Powell credit; disinflation without mass joblessness is happening despite his move to jack up interest rates, not because of it. And while the Fed is expected to begin lowering interest rates later this year, Powell should still be regarded as a hazard to the health of our polity and our planet.
Just a few weeks ago, Powell told security to “close the fucking door” on a group of climate campaigners who interrupted a speech he was giving. Powell’s palpable contempt for the protesters was another reminder that President Joe Biden should never have renominated the former private equity executive to lead the Fed. The magnitude of Biden’s mistake has become increasingly clear in the roughly two years since he made it.
Put bluntly, Powell is doing a bang-up job of hastening the end of civilized life on Earth. First, his refusal to use the U.S. central bank’s regulatory authority to rein in the financing of fossil fuels is locking in more destructive warming. Second, his prolonged campaign of interest rate hikes is hindering the greening of the economy at a pivotal moment when there is no time to waste. Last but not least, the high interest rate environment Powell has created is improving Donald Trump’s 2024 electoral prospects—and given Trump’s coziness with the fossil fuel industry, his election would be a death knell for the climate.
Nevertheless, we have yet to hear a mea culpa from prominent Powell cheerleaders, who argued that the Fed Chair’s pre-2022 dovishness outweighed his regulatory deficiencies. What has become painfully clear is that Powell’s actual hawkishness is undermining the investment incentives of Biden’s green economic agenda.
Biden tapped Powell for a second four-year term despite opposition from public interest groups, including Public Citizen and the Revolving Door Project, where my colleague Max Moran identified several better candidates. The recent anniversary of Powell’s renomination should invite critical reflection on the arguments made by his supporters and detractors alike during the drawn-out battle to staff Biden’s Fed. Struggles to reshape financial regulation will only grow more fierce in the coming years, and the left needs to be prepared to fight for central bank leaders who are committed to advancing whole-of-government responses to the intertwined climate and inequality crises.
What were people thinking? Reassessing the cases for and against Powell
As evidence mounts that rate hikes imposed by Powell (and many of his central banking peers abroad) are making global climate apartheid more likely, it’s worth revisiting why many establishment liberals and even some progressives advocated on his behalf in the summer and fall of 2021—and why others on the left sounded the alarm.
According to Powell’s defenders at the time, the Fed Chair’s response to the Covid crisis demonstrated that he would strive, unlike his predecessors, to fulfill both parts of the institution’s dual mandate: maintaining low inflation and pursuing full employment. Furthermore, they insisted, Powell’s GOP affiliation would allow him to do so while retaining the support of congressional Republicans, the corporate media, and Wall Street.
Powell’s opponents welcomed the chair’s dovish approach to monetary policy from 2018 to 2021, though they simultaneously acknowledged his history of changing positions based on political whims. They remained unconvinced, however, that Powell was the only candidate who would give maximizing employment equal priority as keeping inflation below the Fed’s arbitrary and untenable 2 percent target. Lael Brainard, then the only Democratic member of the Federal Reserve Board of Governors, could be expected to do that and perform better at other, equally important aspects of the job, they argued, regardless of whether right-wing lawmakers backed her.
Obviously, the notion that Powell’s purported commitment to full employment would lead the Fed to keep interest rates low was quickly brought into disrepute. Just one week after Biden renominated him, the Fed chair had already changed his tune. And in early 2022, Powell launched the most drastic and sustained campaign of rate hikes in decades, earning comparisons to Paul Volcker.
But Powell’s critics, especially those concerned with climate justice, didn’t need the benefit of hindsight to see that the incumbent was a problematic pick. They had already argued convincingly that Powell’s weaknesses on financial regulation should be disqualifying. The passage of time has revealed how wrong Powell’s supporters were to dismiss progressives’ warnings about Powell’s ethical failures as well as his penchant for deregulation, which reared its ugly head with the 2023 collapse of Silicon Valley Bank and Signature Bank.
Robinson Meyer, the founder of climate media outlet Heatmap and contributor to the New York Times, was an early Powell supporter. His piece, titled “The Planet Needs Jerome Powell,” is an emblematic pro-Powell article published by The Atlantic in September 2021, amid the lengthy fight over Biden’s pick for Fed chair. Meyer admonished the climate left for its supposed lack of seriousness about the Fed’s role in macroeconomic management. According to Meyer’s narrow interpretation (shared by neoliberal blogger Matt Yglesias), the Federal Reserve as an institution is basically reducible to monetary policy and has little of consequence to do with financial regulation.
The demand from “regulation hawks” for a central bank leader who would ramp up Wall Street oversight was misguided, Meyer suggested, because the Fed’s actions on this front “won’t directly reduce carbon pollution.” “Employment hawks,” on the other hand, were right to focus on Powell’s dovishness, he added, because keeping interest rates low to spur green investment is the best a central banker can do on climate. It’s a sad irony that the Fed’s ensuing imposition of rate hikes has undermined the decarbonization effort that Meyer said Powell was best suited to oversee (more on that later).
Contra Meyer, financial regulation is a key aspect of the Fed’s work. If the central bank were to earnestly address the climate emergency’s threats to the financial system (and financiers’ threats to the climate), it would lead banks and other lenders to cease new investment in fossil fuels, an increasingly risky asset class that is not only highly destructive but also likely to become stranded. The continued financing of greenhouse gas emissions makes predatory subprime lending look tame by comparison.
Powell has refused to curb lending to planet-wrecking fossil fuels
Future historians will be at pains to explain why the world’s 60 largest private banks provided more than $5.5 trillion in financing to the fossil fuel industry from 2016 to 2022, including over $1.5 trillion after 2021—the year the International Energy Agency declared that investments in new coal, oil, and gas production are incompatible with its net-zero by 2050 pathway.
Those historians might also ask why regulators allowed Wall Street to pour vast sums of money into ecologically destabilizing and soon-to-be-outdated infrastructure during this crucial decade. At a time when transformative interventions are necessary, the Treasury Department has opted to release voluntary principles for net-zero financing and investment, while the Securities and Exchange Commission is finalizing rules that would require companies to report some of their greenhouse gas emissions and make other climate-related disclosures. Meanwhile, all the Fed has done so far is bail out fossil fuel companies at the beginning of the Covid pandemic and publish—alongside the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency—weak guidance for climate risk management at big banks.
As watchdogs observed earlier this year, the Fed’s proposals are “much vaguer than the detailed expectations laid out by global peers.” This is unconscionable, especially because Powell and other top U.S. regulators have already been empowered by Congress to rein in reckless lending by “too-big-to-fail” or systemically important financial institutions.
Specifically, Section 121 of the Dodd-Frank Act instructs the Federal Reserve to determine whether a bank holding company or nonbank SIFI poses a “grave threat to the financial stability of the United States.” With the approval of the Financial Stability Oversight Council (FSOC), the Fed “can take a host of actions, including imposing limitations on an institution’s activities, prohibiting activities, or forcing asset divestiture,” Graham Steele, former Assistant Secretary for Financial Institutions at the Treasury Department, explained in a landmark 2020 report published before he joined the Biden administration. “While this authority contains some built-in procedural complexity, a Federal Reserve determined to mitigate climate risks should use it to force the largest, most systemic bank holding companies, insurers, and asset managers to divest of their climate change-causing assets.”
The Fed not only has the authority to minimize climate-related financial risks, but doing so falls squarely within its core responsibilities, regardless of Powell’s insistence to the contrary. The Fed is tasked with macroprudential regulation (i.e., managing systemic financial risks), and the existential threat of climate change by definition endangers economic stability. To ignore it is a clear dereliction of duty.
It’s not hard to imagine the outsized positive impact that a progressive leader of the Fed could have on shutting down planned increases in fossil fuel combustion. Consider, for instance, that just four U.S.-based financial giants—JP Morgan Chase, Citi, Wells Fargo, and Bank of America, all of which are SIFIs—account for roughly one-quarter of the aforementioned lending to coal, oil, and gas firms, much of which is bound to end up as stranded assets.
The Fed Chair has not only failed to halt fossil fuel expansion, but also has simultaneously inhibited the buildout of a more sustainable economy by embarking on an unwarranted campaign of interest rate hikes. Powell’s alleged dovishness turned out to be remarkably shallow, and it remains true that better Fed Chair candidates dismissed by Meyer and ignored by Biden were more dedicated to the Fed’s full employment mandate.
Powell has imposed transition-impeding interest rate hikes
Since the start of 2022, Powell has raised the federal funds rate from 0.08% to 5.33%, increasing the costs of borrowing enough to stymie the green economic transition while doing little to alleviate inflation (the professed reason for the rate hikes).
It has become ever more apparent over time that rising interest rates are hampering efforts to decarbonize energy supplies and electrify transportation, housing, and other key sectors. High interest rates have had the dual effect of rolling back productive investment and lowering consumer demand, causing substantial drops in the stocks of major solar, wind, and other renewables-based companies; undermining the deployment of offshore wind projects; delaying the construction of electric vehicle (EV) factories; and slowing the installation of heat pumps.
In effect, Powell is exercising veto power over the Inflation Reduction Act and ruining “the economics of clean energy,” as David Dayen explained recently in The Prospect. President Biden’s signature climate legislation contains hundreds of billions of dollars in subsidies for green industrialization, but repeated interest rate hikes have driven up financing costs enough to outweigh them. As Dayen noted, this is especially the case because the law’s reliance on tax credits requires upfront investment decisions.
It’s worth stressing here that while inflation has declined significantly since its June 2022 peak, Powell’s crusade had little to do with it. The Fed Chair made clear that his goal with interest rate hikes was to “get wages down” (and thus suppress demand) by ramping up unemployment. Fortunately, inflation diminished even in the absence of an uptick in joblessness. The upshot is that while Powell surely wants credit for taming inflation without provoking a recession, he doesn’t deserve it. His chief accomplishment has been to unnecessarily stifle the nascent shift to a greener economy, an ominous development with negative ramifications.
Powell is boosting Trump’s electoral chances
Powell—a lifelong Republican and former private equity bigwig—isn’t just thwarting the green economic transition right now. His obdurate leadership of the U.S. central bank is increasing the costs of housing, automobiles, financed consumer durables, and credit card debt—contributing to widespread anger about the state of the economy even as “Bidenomics” delivers low unemployment and much-needed wage compression. Economic discontent is helping Donald Trump’s 2024 election chances and thus hurting humanity’s long-term prospects for averting the worst consequences of the climate crisis.
It’s a cruel irony that Powell’s interest rate hikes have inflicted real-world harms while being incapable of addressing their purported target: inflation. That’s because the cost-of-living crisis of the past two years didn’t result from a wage-price spiral, as promised by Larry Summers; it was fueled by sellers’ inflation, or corporate profiteering, and exacerbated by the elimination of the pandemic-era welfare state. When the onset of Covid and Russia’s invasion of Ukraine upended international supply chains—rendered fragile through decades of neoliberal globalization—corporations bolstered by preceding rounds of consolidation capitalized on both crises to justify price hikes that outpaced the increased costs of doing business. That safety-net measures enacted in the wake of the coronavirus crisis were allowed to expire only made the situation worse.
Given that the inflation saga of the past two years is inseparable from preexisting patterns of market concentration, progressives have argued against job-threatening rate hikes (note that jacking up unemployment is the only mechanism through which the Fed could lower inflation; for more, see my colleague’s deep dive on the matter) and for a more relevant mix of policies, including a windfall profits tax, stronger antitrust enforcement, and temporary price controls. Unlike the blunt instrument that Powell has been wielding ineffectively, those tailored solutions—the last two of which are within the Biden administration’s ambit—have the potential to dilute the power of price-gouging corporations without hurting workers.
Although inflation is easing, prices remain elevated compared with people’s historic expectations, and rising rents and debts continue to overwhelm households. Biden needs to use his bully pulpit to advocate for a government crackdown on corporate villains. The outcome of the next election—and the fate of U.S. democracy and the planet writ large—depend on it.
Tight monetary policy is making Trump’s return more likely. That makes Biden’s decision to renominate a Trump appointee whose main priority (to allegedly attack profit-driven inflation with the ill-equipped tool of interest rate hikes) conflicts so sharply with the White House’s own stated industrial policy goals (to spur investment in green technologies) all the more nonsensical.
Biden already has to contend with obstructionism from congressional Republicans (and a handful of corporate Democrats) as well as the Supreme Court’s far-right majority. Now, thanks to his own unforced error, the president has to deal with obstructionism from his hand-picked Fed leader—a former partner at the Carlyle Group, one of the world’s most notorious union-busting and fossil fuel-investing private equity firms.
It bears repeating that careful observers of the Fed are right to worry about climate change—and to stress the agency’s rulemaking authorities and obligations—because nothing else poses a greater threat to economic well-being. What the planet needs more than anything is for Powell to start taking his entire job seriously.
Powell’s inaction is hardly surprising given his January 2023 declaration that the Fed is not and never will be a “climate policymaker.” But Powell’s assertion could not be more wrongheaded; central bankers around the world are key climate policymakers whether or not they identify as such. The United Nations warned ahead of COP28 that the world is currently on pace for a “hellish” 3°C (or about 5.4° Fahrenheit) of warming by 2100. Do Powell and his colleagues seriously think that such a calamity wouldn’t imperil macroeconomic performance?
Frankly, millions of people’s lives and billions of dollars of property are already being destroyed by an ostensibly “safe” amount of climate change (the world is roughly 1.3°C warmer now compared with preindustrial averages). More than doubling extant temperature rise by century’s end would unleash increasingly frequent and severe extreme weather disasters, inflict trillions of dollars in monetary damages, and cause incalculable amounts of pain, including significant losses of lives, livelihoods, cultural artifacts, and biodiversity. A world beset by intensifying heatwaves, droughts, wildfires, storms, and floods will be a world full of ruined cities, factories, and farms. It will also be a far more expensive place to live.
Despite Powell’s apparently steadfast commitment to maintaining price stability, he is actively undermining the possibility of steady prices in the long-run. Again, this isn’t for a lack of tools. It’s for a lack of political willpower. While some of the Fed’s foreign counterparts are currently exploring or implementing mandatory disclosure rules, more stringent climate stress tests of banks’ assets, and direct investment or lending policies that prioritize green enterprises, the U.S. is falling further behind.
Powell should have listened to those activists he dismissed recently because they are right—it’s past time for the Fed to protect the climate from the havoc wreaked by the financial system and vice versa. If Powell won’t do everything in his power to restrain fossil fuel financing and incentivize green investment, then Biden should explore whether he can fire him for cause and appoint someone who will.
Kenny Stancil is a Senior Researcher at the Revolving Door Project.
After more than a year of aggressive rate hikes, the Federal Reserve has now held them steady after each of the past two Federal Open Market Committee meetings. After peaking at levels not seen in decades, inflation has leveled off in the three-to-four percent range for months now. On top of that, job openings, and consumption all seem to have slowed notably. All of this adds new context to the debate between proponents and opponents of Fed hawkishness.
When elevated inflation first became a serious concern following macroeconomic shocks—from a global pandemic, huge recession fighting policy, and (later) the Russian invasion of Ukraine—economists and pundits quickly split into two broad camps on what was happening. On the one side, there were those who saw high inflation as a passing issue due to serious disruptions caused by giant exogenous shocks. That group, dubbed “team transitory,” believed that this bout of inflation was not due to overstimulation of the economy. On the other side were those who insisted inflation was being driven by the demand side; they argued that the fiscal stimulus had been too large, and that the job market in the recovery was too strong. That view relied on the idea that prices were responding to elevated demand from excess savings, rather than price shocks in the supply chain or corporate price manipulation.
In retrospect, the evidence shows that team transitory was right (although additional shocks to the macroeconomy kept inflation high longer than most of them predicted). And yet, despite the mounting evidence and the early signs of economic cooling, the Fed has not reversed course. A big part of why is a compulsion to try and get inflation to two percent. But that fixation now poses a serious threat to our economic well being.
Back at the start of this year, I wrote a piece covering the Federal Reserve’s two percent inflation target and why taking it as gospel is misguided. Since then, there has been considerable discussion about whether the target rate should be changed, with the case for abandoning two percent made in The Financial Times last spring by Columbia University’s Adam Tooze. Following that, the FT published a letter to the editor arguing against Tooze’s point, Harvard economist Jason Furman agreed that it was worth reconsidering, and former Treasury Secretary (and sleazy fintech businessman) Larry Summers thoroughly dissented.
As Nobel Laureate Paul Krugman has written, the primary concern about easing the two percent target revolves around nebulous fretting about the credibility of the Fed. As he put it, proponents “fear that if they ease off at, say, 3 percent inflation, markets and the public will wonder whether they will eventually accept 4 percent, then 5 percent and so on.” Such concerns seem rather oblivious to the Fed’s extremely strong (potentially too strong) inflation-fighting strategy. Surely, they’ve built up enough of an inflation hawk reputation that they can take a slight hit. Moreover, despite inflation running slightly high still, financial markets seem at ease with the current level and inflation expectations have remained anchored. All of this makes warnings of a loss of faith in the Fed seem like a bit of a reach.
Before we get into the weeds, it’s worth explaining the origins of the two percent figure. What’s the importance of that specific figure? As I wrote, “the target is more tradition than science.“ The exact figure originated from a television interview with the New Zealand Finance Minister in the 1980s. At the time, New Zealand was experiencing serious inflation, nearly ten percent, and the government wanted to give the central bank a codified target. Since then, two percent as a target has become the norm among rich countries. However, not every central bank that uses it as a baseline clings to it as aggressively as the Fed; a number of them, including the Bank of Canada and the Reserve Bank of Australia, use a more flexible version of the target. In Canada, the target is two percent plus or minus one percent. In Australia, it’s two to three percent. A quick glance shows that such ranges are not at all unusual. Until relatively recently, the Fed’s target was similarly flexible by de facto.
Indeed, the exact figure was only officially adopted by the Fed under then-Chair Ben Bernanke in 2012 (though it had been tacitly endorsed since 1996). In the 1990s, future Fed Chair Janet Yellen was among those who pushed for a higher target rate to allow more discretion on the Fed’s part and guard against deflation.
Additionally, as Krugman has explained, two percent also became typical because it functioned as something of a compromise between economists who wanted absolute price stability (a zero percent inflation target) and those who wanted positive rates to give central banks more room to fight recessions by allowing for a lower real interest rate.
There are arguments about why such a target is good, but practically none of them are specific to two percent. Because inflation measurements tend to skew higher than the true level, it can be important to have a positive target even if the goal is to have functionally no inflation. Certainly, in order to have stable prices, we must have a target that’s relatively low. But that explains why two percent is preferable to, say, ten percent, not why it’s any better than slightly higher inflation. In fact, work by scholars at the University of Massachusetts shows that three to four percent levels don’t constrain growth and can be conducive to stronger economic performance than inflation of two percent.
There is a very good reason, however, why the target needs to be a low positive number. If the target is zero percent or lower, then there is a higher risk of deflation, where people’s money becomes more valuable, which can trigger a recession because the return generated by parking assets deters people and firms from spending and investing, instead opting to sit on their money. This then tanks the “velocity” of money, an econ term for how freely money circulates in the economy; a healthy economy needs money to be moving.
A positive target also allows for monetary policy to better fight recessions. While theoretically possible, banks (including central banks) don’t offer nominal negative interest rates. If they were to, no one would keep their money there (which in turn means they wouldn’t really be impacted by rate changes) unless they were forced to. What central banks can do is create negative real interest rates, but only if inflation is more than zero. (Real interest rates are equal to nominal rates minus the inflation rate.)
On the other hand, there are reasons why holding on tightly to two percent is bad policy. To start, it commits the Fed to prioritizing aggressive inflation fighting over the other half of its mandate: maintaining full employment. Committing to such a low target and refusing to reevaluate is a promise to sacrifice jobs in order to reach such a low level of inflation. Particularly given that there is no strong empirical evidence that two percent is hugely preferable to three or four percent, there is no reason for the Fed to be creating conflict between its dual mandates that otherwise need not exist. This is further exacerbated by the de-linking of employment and inflation captured in the Phillips Curve. In the United States, the relationship simply does not hold. As a result, higher rates from the Fed can force investment and employment down, but without making a dent in inflation.
The obvious counter to such an argument is that the rate hikes haven’t triggered a recession, spiked unemployment, or seriously undermined investment. To the extent that this is true, that can, in itself, be a reason to stop relying on high interest rates to lower inflation; employment is the mechanism by which rate hikes would be expected to influence inflation. The fact that inflation fell without a recession or mass unemployment clearly demonstrates that keeping rates high in pursuit of a two percent target is misguided.
Remember, also, that when the rate hikes started the economy was very strong. And new job openings have fallen since then. Given the significant lag between rate changes and observable macroeconomic adjustments, it’s entirely possible that we are heading in that direction and it’s just taking a while. Regardless, maintaining high rates that risk undermining the labor market and the broader economy still isn’t worth it when it isn’t achieving any meaningful policy goals.
Additionally, given the trend of Secular Stagnation, there’s reason to believe that slightly higher inflation is necessary in order to fight future recessions without hitting the zero lower bound. In an economy with secular stagnation, negative real interest rates become more important because nominal interest rates will stay low most of the time to encourage investment rather than savings. Ironically, this theory was popularized by Larry Summers, who is now one of the champions of inane defenses of central banking as usual.
And, as Adam Tooze pointed out, higher interest rates being deployed to push inflation down can also stress banks and depress developing economies. The Fed’s elevated interest rates create a higher cost of borrowing, undermining banks’ ability to cover any current shortfalls. As the mantra goes, banks borrow short and lend long. All fixed-rate loans that they made before the rate hikes can be locked into a lower rate than the bank can borrow at, meaning they lose more in interest payments than they earn. And if there’s a bank collapse, that can easily spark a financial crisis and lead to a recession.
Developing countries, meanwhile, are going to get loans on much worse terms—that might be difficult to pay off—while rates are high. That in turn could undermine their ability to build out infrastructure and new industries, causing lost income. In all, this means gains from global trade will be lower than they could be, keeping poverty, underdevelopment, and global inequality worse than they might otherwise be.
So why is the Fed’s credibility, rather than resting on good policy, tied intimately to a target of two percent? Former investment banker Stephen King wrote in response to Tooze, “choosing to raise targets when inflation has persistently surprised on the upside smacks of no more than short-run political opportunism.” Similarly, Summers wrote that:
…the chairman needs to respond explicitly or implicitly to the growing chorus suggesting that the Fed should adjust its inflation target. For years, the Fed has been firm in its commitment to 2 percent. Of course, there are legitimate academic arguments about the merits of having a numerical target and, if so, what it should be. But timing and context are crucial.
But their argument runs counter to what is supposed to be the bedrock of Fed credibility: a commitment to following the data. Although both King and Summers concede that there are good academic arguments for changing the target, they argue that now is not the time. But the opposite is true—changing the target now is ideal because it would epitomize the Fed’s commitment to following the evidence and maintaining its dual mandate. All of the best available evidence shows that monetary policy cannot possibly be responsible for disinflation. The only theoretical mechanism for it to have done so would be via the employment rate, which remains strong.
To continue to obsess over two percent simply commits Powell to a course of action that will betray half of the Fed’s mandate and runs counter to the best evidence available. No one seriously advocating a change is calling for a hairpin U-turn. Indeed, they can even follow Furman’s step-by-step guide on how to properly change course.
Additionally, there are reasons why abandoning or altering the two percent target very soon is appropriate, beyond the general issues outlined above. For one, the harm of a recession right now would likely be worse for ordinary people because of the extremely high interest rates. If a recession were to begin before the Fed starts lowering rates, then the job loss and decreased economic mobility that comes with it would also be paired with a very high cost to borrow. That means that people who don’t have significant savings and lose their jobs will find it more costly to use credit cards, personal loans, or home equity to fill the gap until they find work.
On top of that the high interest rates are a barrier to people buying houses, which has multiple downstream impacts. To start, it has locked many out of using a home to build equity, which is one of the biggest forms of wealth building in the American economy (and eliminates one possible form of borrowing for a lot of folks). It also forces more people to live in rental properties, which see rent increases because of additional demand (plus rent is already high because of residential price fixing). To round things out, it hurts people who already have homes as well. High rates can make it prohibitively expensive for people with houses they own to move, even if they would have more opportunities somewhere else. Between getting less money from selling their home and extreme mortgage interest rates, moving would probably mean either lowering their standard of living or becoming a renter, unless they moved to somewhere with a much lower cost of living.
The Fed has even seemingly acknowledged that the target is less than ideal; they frame the target as a long term average of two percent inflation. But that doesn’t actually increase flexibility because it only enables them to ease inflation fighting in the present to the extent that they’re confident that inflation will be below two percent in the future to average things out. A much better and simpler solution would be to revise the target upwards to three percent or create a range of two percent plus or minus one percent, either of which would no longer call for elevated interest rates and both of which have international precedents.
When Paul Volcker’s war on inflation ended not quite half a century ago, the inflation level was still four percent. And the following Reagan years are remembered for a robust economy featuring a historic presidential re-election. The hyperfixation on getting down to two percent accomplishes little—well, unless returning Trump to office is one of Powell’s goals—and risks a whole lot. It exposes banks to huge interest rate risk, makes it harder for developing countries to build themselves up, limits housing options, makes people more vulnerable if a recession does come, and creates an ever-present threat of causing mass unemployment or major cuts to economic investment. Meanwhile, virtually all of the good parts of the target will still apply—some even more so—with a slightly higher or more flexible target.
Dylan Gyauch-Lewis is a researcher at the Revolving Door Project.
Paradigm change is hard. It took over a year to overcome significant ridicule from neoliberal economists and pundits for the evidence to be so compelling as to flip the consensus on the causes of inflation. Business press outlets from the Wall Street Journal to Bloomberg to Business Insider now perceive what some heterodox economists have recognized for a while—that companies in concentrated industries were exploiting an inflationary environment to hike prices in excess of any cost increases they were incurring. (Alas, The Economist refuses to see the light.) Even Biden’s director of the National Economic Council, Lael Brainard, refers to this bout of inflation as a “price-price spiral, whereby final prices have risen by more than the increases in input prices.”
It’s hard to assign credit for flipping the script, but a few brave economists deserve mention. Isabella Weber, an economist at the University of Massachusetts, published a provocative article, co-authored with Evan Wasner, titled “Sellers’ Inflation, Profits and Conflict: Why Can Large Firms Hike Prices in an Emergency?” They explain how firms with market power only engage in price hikes if they expect their competitors to follow, which requires an implicit agreement that can be coordinated by sector-wide cost shocks and supply bottlenecks.
Josh Bivens of Economic Policy Institute debunked the neoliberal claim that wage demand was driving inflation, showing instead that corporate profit was responsible for more than one third of the price growth. Mike Konzcal and Niko Lusiani of the Roosevelt Institute demonstrated that U.S. firms that increased markups in 2021 the most were those with the higher mark-ups prior to the economic shocks, an indication that concentration was facilitating coordination. (If one were to expand the list of thought influencers beyond economists, you’d have to start with Lindsay Owens of the Groundwork Collaborative, who has been analyzing what CEOs say on earnings calls since the onset of inflation.)
With the new consensus, we need think creatively about attacking inflation. We have more than one tool at our disposal. Rate hikes might ultimately slow inflation, but at enormous social costs, as that mechanism requires putting people out of work so they have less money to spend. What’s worse, rate hikes are regressive, with the most vulnerable among us bearing the largest costs. Solving the inflationary puzzle calls for a scalpel not a chainsaw: We need to identify the industries that contribute the most to inflation (e.g. rental, electricity, certain foods), and then tailor remedies that attack inflation at its source. To use one analogy, it wouldn’t make sense to bulldoze a house because a fire was burning in one room. You’d find that room and put out the fire. I am calling for seven policies in particular.
(1) More Bully Pulpit. The President should use the bully pulpit more—recall JFK’s turning back steel price hikes in 1962. Biden called out junk fees in his state of the union address, causing airlines to remove unwarranted fees for families sitting together. Clearly, Biden can’t hold a press conference about a misbehaving industry daily. But he has not come close to tapping this well.
(2) More Congressional Hearings. Congress should hold hearings to call executives to account for price gouging. Although Congress has held hearings with experts, they have yet to summon the CEOs of industries employing massive price hikes, seemingly in coordination—as if they were some tacit agreement to raise prices in unison. I’d start by calling the CEOs of the packaged food makers, PepsiCo, Unilever, and Nestlé, who bragged last week to investors about record profits, massive price hikes, and enduring pricing power.
(3) The FTC to the Rescue. The FTC should investigate firms for announcing current or future price hikes (or capacity reductions) during earnings calls under the agency’s unique Section 5 authority to police “invitations to collude.” These cases of “tacit collusion” are much harder to prosecute under the Sherman Act. If the FTC were to publicly announce an investigation into a firm or industry—airlines (admittedly outside the FTC’s jurisdiction) or retail would be a good place to start—it would force CEOs economywide to exercise more caution about sharing competitively sensitive information on earnings calls.
(4) Limits on Concentrated Holdings: The cost of shelter makes up a significant share of the core CPI. Cities or states should move to limit the holdings of any individual firm within a given census tract. My OECD paper, co-authored with Jacob Linger and Ted Tatos, showed the nexus between rental inflation and concentration in Florida. A natural cap for a single owner would be five or ten percent of all rental properties in a neighborhood. Raising interest rates, our default anti-inflation tool, perversely puts home ownership out of reach of millions of families, driving them to the rental markets, which bids up rental rates, which is one of the primary drivers of inflation.
(5) Price Controls Should Be on the Table. Price controls are the ugly stepsister in economics. But when backed by a public campaign, they have proven to be effective. Congress imposed price caps for insulin copays in the Inflation Reduction Act, but only for those patients covered by Medicare. Insulin makers, beginning with Eli Lilly, saw the writing on the wall, and voluntarily imposed the $35 cap on all patients. So long as caps are sparingly used in mature industries, the standard investment concerns of economists should be mitigated. The lesson from insulin is that the mere talk of price controls can induce an industry to temper their enthusiasm for price hikes.
(6) Government Provisioning. The threat of government provisioning is another lever that may force private industry to behave. To wit, California offered a $50 million contract to makes its own insulin, which coincided with Eli Lilly, Sanofi and Novo Nordisk preemptively reducing their prices. This playbook could be used in other industries where inflation remains stubbornly high. We can anticipate libertarians screaming “socialism,” but if the cost of inaction is more rate hikes and unemployment, I’d take the libertarian jeers any day.
(7) Fix Antitrust Law. Congress should amend the Sherman Act to give the DOJ, state attorneys general, and private enforcers a better shot at policing tacit collusion among firms in concentrated industries. Courts have implicitly adopted the notion that oligopolistic interdependence is just as likely to achieve prices inflated over competitive conditions as agreement, and so “merely” alleging or putting forward evidence of parallel pricing, excess capacity, and artificially inflated prices is insufficient to prove agreement under Section 1. But why should we presume that it is just as easy to maintain artificially inflated prices tacitly than through agreement?
Congress should flip the presumption. In particular, Section 1 of the Sherman Act should be amended so that the following shall create a presumption of agreement: Evidence of parallel pricing accompanied by evidence of (a) inter-firm communications containing competitively sensitive information, or (b) other actions that would be against the unilateral interests of firms not otherwise colluding, or (c) prices exceeding those that would be predicted by fundamentals of supply or demand. Moreover, the Sherman Act should be amended to permit courts to sanction corporate executives who participated in any price-fixing conspiracy upon a guilty verdict, by barring the executives from working in the industries in which they broke the law, either indefinitely or for a period of time.
Industrial organization gatekeepers like to poo-poo the idea of using competition tools to attack inflation, noting that antitrust moves too slowly. This is needlessly pessimistic. It bears noting that none of the seven remedies suggested here involve bringing a traditional antitrust case against a set of firms pursuant to the Sherman Act. The common thread that binds the first six remedies is inducing a short-run shift in industry behavior. A forced divestiture of rental properties over a holding limit would inject downward-pressure on rents in the short run. CEOs don’t want to be called out by the president or called to testify before Congress to explain their record-breaking profits attributable to massive price hikes above any cost increases. A public investigation by the FTC into invitations to collude via earnings calls would also have an immediate effect on CEOs. Nor would CEOs take lightly to being barred for life from an industry for participating in a price-fixing scheme.
The seven interventions outlined here will require an all-of-government approach. Biden should create a task force to carry out these policies and issue an executive order to signal his seriousness to other agencies. There are two paths for Biden’s legacy: Do nothing about inflation and leave it to the Fed to engineer a recession that likely ends his presidency, or grab the reins himself. With the new consensus emerging that profits (and not wage demands) are driving inflation, the time has come to change our approach.