Ann Pettifor, the British economist who correctly predicted the 2008 financial crisis, has accused central banks of prioritizing “class war over financial stability.” In her Substack newsletter, Pettifor criticized central banks, including the U.S. Federal Reserve (Fed) and the European Central Bank, for their aggressive approach to tackling inflation at the expense of people and businesses. Several high-profile banking collapses in the U.S. and Europe have raised concerns about the consequences of this strategy.
Central banks have attributed inflation to tight labor markets and high wages. Their efforts to loosen job markets could potentially cool the economy but also result in layoffs, joblessness, and even a recession. Pettifor argued that central banks are willing to sacrifice private banks and global financial stability to raise interest rates, suppress demand, and discipline workers.
The Fed’s role in Silicon Valley Bank’s recent collapse has come under scrutiny, with critics accusing the central bank of contributing to the bank’s failure by shifting away from a near-zero-interest rate environment. This made the bank particularly vulnerable to a liquidity crisis, a fate other banks may also face.
Pettifor referenced an interview between former Treasury Secretary Larry Summers and comedian Jon Stewart, in which Summers advocated for raising rates and addressing inflation at any cost. Stewart, however, questioned the Fed’s focus on labor costs while seemingly ignoring the significant role of corporate profits in driving inflation.
Prominent economists, including Fed Chair Jerome Powell, have depicted the pain experienced by workers and lower-income groups as a necessary evil in the battle to reduce inflation. Critics argue that targeting the labor market to control inflation disproportionately impacts workers and contributes to financial instability, as evidenced by this month’s banking crisis.
Notable political figures, including Senators Elizabeth Warren and Bernie Sanders, have joined Pettifor in criticizing central bank policies. They argue that high interest rates pose risks to the labor market and could lead to millions of Americans becoming unemployed.
A 2022 study by the Economic Policy Institute found that over half of price increases for goods and services were due to larger profit margins among corporations, while only 8% were linked to higher labor costs. Some economists, such as Mohamed El-Erian, suggest that the Fed’s 2% inflation goal may be outdated and that a higher stable rate of 3-4% could be more appropriate.
It remains to be seen whether recent banking failures and criticism from the left will sway Powell and the Fed from their commitment to controlling inflation at all costs. Clarity on the Fed’s direction may emerge when officials meet on Wednesday to discuss the size of the next interest rate hike.
The central banks’ focus on inflation, particularly labor market tightness, has been called “monomaniacal” by Wharton professor Jeremy Siegel. Siegel argued that since the beginning of the COVID-19 pandemic, worker wages have been rising more slowly than inflation, making it hard to argue that labor costs are the main contributor to inflation.
The debate surrounding the Fed’s approach highlights the need for a balanced strategy in managing inflation while minimizing the detrimental effects on workers and businesses. If central banks continue to prioritize inflation control at any cost, they risk exacerbating financial instability, increasing unemployment, and further straining an already fragile global economy. Ultimately, the question remains: is the cost of controlling inflation worth the potential harm it may inflict on those most vulnerable in society?
