April 1, 2023

In Jackson Hole, Wyoming, on Friday, Federal Reserve Chairman Jerome Powell said the Fed must continue raise interest ratesalthough it would “bring some pain to homes and businesses”.

IMHO this is crazy.

True, inflation is near a four-year high. But the Fed is actively trying to tame it by raising rates aggressively — Fastest series of rate hikes Since the early 1980s – increased risk of recession. Powell’s remarks suggested the Fed could raise rates by another 2/4 percentage point in September, further raising the risk.

The pain has been felt all over the land. Wage growth cannot keep up with inflation. This means that most Americans continue to lose their economic base.

Powell is actually telling them they’re going to lose more ground. He acknowledged that higher interest rates would slow economic growth and lead to “soft” labor market conditions – a euphemism for lower wage growth and fewer jobs. But “those are the unfortunate costs of lower inflation”.

At the same time, however, corporate profits continued to soar.Profit margins are at their highest level since 1950, according to Commerce Department data Posted Thursday.

Wait a moment and let your mind think about this: The price a business charges its customers is beyond No matter how much increased material and labor costs businesses face.

In other words, wages are not driving up inflation. Production costs are not driving up inflation.

Businesses are driving up inflation. The single largest source of inflation in the U.S. is the pricing power of companies.

So why is the Fed raising interest rates?Because this is the Fed Do when prices go up. It’s the only tool in the Fed’s toolbox. To quote an old saying, when all you have is a hammer, everything looks like a nail — or, in this case, a hike.

Here’s the thing: it’s mostly a burden on working people and low-income earners to fight inflation. They are the first to lose wages and jobs as the economy slows. They have been hit.

If the Fed keeps raising interest rates to slow inflation, they will be hit harder.

It might make sense if businesses invest their windfall profits in higher production capacity — adding factories, materials, warehouses and jobs — that would expand their ability to meet future demand and thus better protect against inflation.

But they are not. They’re using their profits to buy back their shares so their value doesn’t drop too much in anticipation of a Fed-induced slowdown.

Earlier this year, Goldman estimated that buybacks in 2022 would hit a record $1 trillion. This is unlikely to happen, but buybacks are continuing at a strong pace. In the second quarter, Increase in buybacks An increase of about 7% over the previous year.

Some economists argue that there is no reason to think that companies will now wield more pricing power than they have in the past. Why do they wait until material and labor costs rise before increasing profit margins?

The answer is simple. Inflation gave them cover. They can say – as many do now – that given the rising cost of materials and labor, they have no choice but to raise prices. They just don’t advertise the fact that their profits increase as they do.

This brings us to the core policy question: Why can’t the burden of fighting inflation be put where it should be – big companies continue to raise prices in pursuit of bigger profit margins and higher share prices?

The simple answer is that big corporations have so much political clout that they would never allow policies that would have that effect – like windfall taxes, price controls, higher taxes on themselves and the rich, And bolder and more effective policy antitrust enforcement.

While Democrats did pass a 1% tax on stock buybacks in the recently enacted Inflation Reduction Act, they couldn’t take these other measures. Even the Democratic president and Democrats, who control both houses of Congress, cannot overcome vested corporate interests.

So it all depends on Jerome Powell and the Fed. This means that it is all on the working people.

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