Jerome Powell, Federal Reserve chair, announced that the Federal Reserve would tighten its monetary policy in response the the highest U.S. inflation in 40 years on Wednesday. This announcement came at the close of a two day Federal Open Market Committee meeting (FOMC). The burden of this measure will be shared disproportionately by the working class in the U.S. and internationally.
In a press release the FOMC said the current inflation rate reflected “supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” The Fed raised its benchmark policy rate by 0.75 percentage points, the first increase of this magnitude since 1994. This increases the federal funds rate target range to 1.5 to 1.75%. The Fed will also “continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.”
The Fed is maintaining the course it has adopted since the end of last year as a way out of the pandemic’s economic effects, reaffirmed this year by the Russia’s invasion of Ukraine, which has caused energy and commodity prices to sharply increase. These tightening actions have already been taken. caused a drop in U.S. stock pricesBut the effects will go far beyond that, affecting the working classes in the United States and around the world.
The International Working Class and the United States will Pay the Price
At first glance, the Fed’s aim is to curb inflation — which sits at 8.6 percent — by cooling the economy. Higher interest rates strongly affect the working class, since they make credit more expensive, and it becomes more expensive to spend money, thus reducing people’s disposable income. Higher interest rates often lead governments to impose austerity policies, as it is more costly for them to borrow money.
In the United States, the Fed’s aggressive plan could also increase unemployment by discouraging investment and hiring. This would create the conditions for lower wages. Powell arguedWages have been rising too fast, and it was apparent that this was the case weeks ago. labor market is “tight to an unhealthy level” — in other words, employment is too high. As we have already mentioned, however, previously arguedInflation is not caused by the lack of wages or employment.
Inflation has been eating away at real wages for many decades. This is part of a pattern where workers have lost ground in terms of their pay. Powell does not speak out against growing inequality. He sees no problem that billionaires enjoyed explosive wealth growth during the pandemic, while millions were pushed into extreme poverty.
The U.S. is home to 25 percent of global GDP and has important trade relationships with almost every country. For dependent countries in regions like Latin America, the Fed’s moves to curb inflation threatens to have serious international ramifications, exacerbated by an increasing subordination to the IMF.
For example, international economic growth could be slower. Already, the rate rise has led to a decline in U.S. production prospects and could cause a further decline. This would place the same pressure on the rest the world, putting the jobs and incomes at risk of millions, especially in the most vulnerable economies.
The interest rate increase favors capital moving to the dollar as a secure haven. Investors will decrease their local currency holdings to dollarize, which increases the demand for the U.S. dollar. In fact, the Brazilian real as well as the Chinese yuan were devalued by 6.3 per cent in the quarter just before, and the pressure on Argentina’s peso is increasing. These devaluations can lead to price increases. The increase in the price of imports — both of final and intermediate goods — raises inflation in local economies.
Finally, the Fed’s moves can increase the cost of international credit. This means that credit access will be limited and foreign debts in dollars will become more expensive. This increases the risk of default in emerging economies like Argentina.
In this context, the Fed’s interest rate hikes aren’t just abstract monetary policy; they will reverberate far beyond the U.S. economy. And, as always, capitalists and their institutions are interested in self-preservation, stability, and continuing exploitation — workers and the poor, both in the U.S. and in dependent and semicolonial countries, will be forced to shoulder the burden of these measures. This means it’s more important than ever for the working class to organize to confront these attacks.
Original publication in Spanish on June 16, 2009. La Izquierda Diario.
Translated by Otto Fors.