Op-Ed: The Fed alone cannot fight inflation. We need to hold corporations accountable

On Wednesday, Jerome Powell, the Federal Reserve chairman, testified on Capitol Hill, facing senators angry with him for letting inflation get out of control. The senators should stop blaming the Fed.

Inflation is a problem. It’s now running at an annual 6.8%, the highest in 40 years. Gas prices at the pump are the highest in 14 years. Food prices are soaring.

But the Fed is taking action. On June 15, it raised the benchmark interest rate by three-quarters of a percentage point, the biggest single rate increase since 1994. That was on top of a quarter point in March and a half point in May.

If the Fed continues down this path, the economy could plunge into a recession.

Rate hikes increase the costs of borrowing to individuals and consumers — which causes them to cut back on purchases of everything, including homes. This, in turn, causes the economy to slow.

It’s possible that the Fed could manage a “soft landing” that lowers inflation without causing a recession. But Fed rate hikes often overshoot, especially when on the scale the Fed has embarked on. In 1981, the Fed raised interest rates so high (to reverse double-digit inflation) it plunged the economy into deep recession.

Using rate hikes and relying on the resulting unemployment to fight inflation is like trying to reduce someone’s fever by locking them in a freezer. It may work, but at a horrendous cost.

The people most likely to be hurt are lower-wage workers who are the first to be fired when the economy slows. Also younger people who are trying to get their footing in the job market.

Lawrence Summers, President Clinton’s Treasury Secretary, argued Monday that containing inflation will require five years of 6% unemployment, or two years of unemployment at 7.5% or one year at 10%.

The cost of this alleged cure would be worse than the disease.

American workers are not responsible for today’s inflation. Prices have been rising faster than wages, putting most workers further behind. Real wages have fallen by 3.5% over the last 12 months.

Interest rate hikes will not remedy the major causes of the current inflation — a worldwide surge in post-pandemic demand, global shortages of goods and services in the face of that demand, and Vladimir Putin’s war in Ukraine, which has put upward pressure on energy and grain prices.

On top of all this are big, profitable corporations with enough pricing power to use inflation as cover to raise prices even further. Corporate profits hit a 70-year high last year.

Oil and gas giants have hit a gusher. In the first quarter of 2022, Chevron’s profits more than quadrupled from the year before. ExxonMobil’s profits more than doubled.

Instead of using their profits to ease the burden on consumers at the pump, Big Oil is buying back stock to reward investors with higher share values. ExxonMobil plans to buy back $30 billion of stock this year (up from the $10 billion it announced earlier).

The Fed’s rate hikes also won’t stop the price gouging. At Wednesday’s hearing, Powell said the rate hikes would not lower gas or grocery prices.

Three moves could help, though.

First, vigorous antitrust enforcement that reduces the pricing power of big corporations. Even the threat of such enforcement will make them more reluctant to raise prices.

Second, a windfall profits tax that takes away a portion of their recent profits and rebates them directly to consumers — as the Conservative government in Britain is doing. Or, alternatively, use those tax revenues to temporarily eliminate state and federal gas taxes.

Third, publicity. The government should reveal the names of highly profitable corporations that are flagrantly raising prices — not just Big Oil, but a host of other companies ranging from Tyson Foods to Starbucks. This would have an immediate effect. After all, corporations pay fortunes to burnish their brands.

Earlier this month, Biden wrote to the CEOs of the major oil companies:

“At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable. There is no question that Vladimir Putin is principally responsible for the intense financial pain the American people and their families are bearing. But amid a war that has raised gasoline prices more than $1.70 per gallon, historically high refinery profit margins are worsening that pain.”

Yet he seems unwilling to go beyond some words criticizing big corporations’ actions. Nor has he advocated a windfall profits tax that could be used to help consumers weather the economic pain now.

The Fed cannot and should not be wholly responsible for fighting inflation. Its one tool — high interest rates — wreaks too much havoc.

The Biden administration can do more. Congress should do more. The fight against inflation is important, but in taking on inflation we must be careful not to inflict even greater harm on the most vulnerable members of our society.

Robert Reich is a professor of public policy at the Goldman School of Public Policy at UC Berkeley and the author, most recently, of “The System: Who Rigged It, How We Fix It.” @RBReich

This story originally appeared in Los Angeles Times.