by Robert Reich Warning: The Fed is aiming a battering ram at the American economy. [View all]

The result is likely to be a recession.

As Putin’s war shakes up the world economy, the Fed last week raised interest rates by a quarter point and penciled in six more increases by the end of the year. Fed Chair Jerome Powell says he’s ready to do whatever it takes to bring inflation down, including following the example of his predecessor Paul Volcker, who increased interest rates to 20 percent in 1981.

Volcker’s rate rise triggered a deep recession and double-digit unemployment. We can debate whether that harsh medicine in 1981 was necessary. What should be clear is that the current inflation is nothing like the inflation of the late 1970s — a time when nearly a quarter of all private-sector workers were unionized and American corporations couldn’t easily outsource production. Today, only 6 percent of private-sector workers are unionized — which means workers have almost no long-term bargaining leverage. And today American corporations can outsource almost anywhere (although China is becoming more complicated, and Russia is now off limits).

Inflation is running almost 8 percent annually, which is surely a problem. But it’s not due to permanent wage or price hikes. In fact, it has nothing to do with the business cycle. So expecting the Federal Reserve to remedy today’s inflation by raising interest rates to slow the economy is like trying to cool off on a hot day by aiming a battering ram at your head. Wrong diagnosis. Wrong remedy. The current inflation is the consequence of a perfect storm of unique events that won’t recur — and won’t be remedied by higher rates.

We’re emerging from a once-a-century pandemic during which much of the world economy closed down. In March through May 2020, demand evaporated as people retreated into their homes. Because the nation’s (and world’s) productive capacity couldn’t be closed down all at once (productive capacity includes factories, offices, warehouses, and so on, all of which take a while to wind down), the resulting excess of supply over demand caused a deep recession.

Now, at the other end, and without much opportunity to buy for the last two years, American consumers are flush with cash (the national savings rate is at its highest level in decades). So they want to buy lots of stuff (and they haven’t yet gone back to spending much on services such as restaurants, hotels, air travel, movies and other places where COVID reigned for two years). Yet the nation’s (and the world’s) productive capacity can’t be fully operational all at once. The resulting excess of demand over supply is causing major inflation.'>>>

https://robertreich.substack.com/p/be-warned-the-fed-is-aiming-a-battling?