The Fed has a habit of over-correcting — pause the rate hikes, protect workers

Wednesday the Federal Open Market Committee met and decided to raise interest rates yet again — for the 11th time — a step they argue is necessary to contain inflation.

No one disputes that inflation has been a serious issue and a drag on the U.S. economic recovery. From global supply chain and labor market disruptions to volatile oil and agriculture prices, the pandemic and Russia’s war in Ukraine have had far-reaching consequences for nations everywhere. But as those pressures have eased, so has inflation.

Now, our nation has a lower rate of inflation than most of our peers, declining for twelve straight months and falling from a high of nearly 9 percent last year down to just 3 percent today — within striking distance of the Fed’s 2 percent target range. We have seen remarkable progress in the fight to lower costs, and now our chief concern should be protecting our historic recovery and the workers’ economy Bidenomics has fostered.

The Fed must remember its dual mandate and carefully weigh the potential negative effects of rate hikes on employment. We need a whole-of-government commitment to protecting American jobs and the financial stability of working families nationwide.

The Fed’s primary tool for reducing inflation is to increase the federal funds rate. From the late 1960s through the early 1980s the U.S. experienced persistent inflation, with prices growing at nearly a 15 percent annual rate by early 1980. That period of inflation was finally quelled by the Fed tightening money supply, with the effective federal funds rate reaching around 19 percent in 1981. These rate increases were successful in containing inflation, but were followed by a painful recession where the unemployment rate rose to nearly 11 percent, causing job loss and suffering for millions of workers. This is not a unique outcome: Since 1961, the Fed has raised rates nine times in an effort to rein in inflation — in eight of those nine times they overshot and triggered a recession.

In the post-COVID recovery, the economy experienced another run up in prices driven by supply shocks. The Fed’s current tightening cycle, the most rapid in more than 40 years, has helped deliver a steady decline in inflation. But the overall economic picture is far better today than it was in the late 1970s to early 1980s, as we are experiencing none of high inflation coupled with stagnant growth that plagued that period. Today inflation is under 3 percent, economic growth is steady, and unemployment is hovering below pre-pandemic levels. We are so close to achieving the Fed’s overall aim of a soft landing for the economy post-COVID, but it could be threatened by continued rate hikes.

We know that rate increases help to reduce inflation rates, but they have the potential to come at the cost of gains for workers. While the labor market is strong and adding an average of nearly 250,000 jobs a month, continuing to rapidly increase interest rates could threaten this recovery. In President Biden’s economy, employers are finally competing for talent and workers are empowered to seek out new opportunities and better-paying jobs. A self-inflicted recession that leads to millions of jobs lost will disproportionately hurt low-wage workers and those who are already living in financially precarious positions. We also know that rate hikes take their time to work through the economy, which means that we may not have yet seen the full effects of the Fed’s 10 rate increases.

History tells us that once an unemployment increase begins, it is hard to contain. With inflation at its lowest rate in two years and the economy and wages still stable and strong, continuing to raise rates could imperil millions of American livelihoods, ruin our shot at a soft landing, and threaten a self-inflicted recession. As strong supporters of American workers, we believe the real risks far outweigh the possible benefits.

People in Pennsylvania and Oregon, and throughout this country, are finally seeing an economy with higher wages and opportunity for all. Bidenomics is working, and our economy is in a far better place today than it was one, two, or even three years ago. It’s time to pause the hikes and give the economy a chance to fully recognize the impact of previous rate increases. After Wednesday’s 11th rate hike, the danger of over-correcting is now far greater than the danger of persistent inflation. If the Fed doesn’t get this right, millions of hard-working Americans will pay the price.

Brendan F. Boyle represents Pennsylvania’s 2nd District and is ranking member of the House Budget Committee. Val Hoyle represents Oregon’s 4th District.