History exposes the Fed's inflation fight for what it truly is: a decades-long class war waged against working people under the guise of monetary policy.
Describing the Federal Reserve chair’s monetary policies as “ill-advised,” the President and his Treasury Secretary doubled down on the White House’s urgent message: the central bank’s steadfast refusal to lower interest rates was strangling the economy by making it too costly for creditworthy borrowers—from prospective homebuyers to small business owners—to take out a loan.
In a television interview, the President took aim at the Federal Reserve’s monetarist approach, which relies too much on a single factor—the money supply or the actual pool of banknotes in circulation—to tame inflation. Tightening the money supply through high interest rates tends to exert downward pressure on inflation, but it also discourages borrowing, and consequently, business activity that drives a consumer economy. Said the president:
“Too much is made just by measuring the amount of money in our system.”
The President’s Treasury Secretary went a step further, voicing his “surprise,” “puzzlement” and “concern” at the Fed’s interest rate policy. While attending an international financial conference in Washington, the Treasury Secretary told reporters:
“We know we must give a high priority to inflation but we also need a more predictable regime where economic activity can take place.”
These remarks, however, are not attributable to President Donald J. Trump nor his Treasury Secretary Scott Bessent in the White House’s ongoing beef with Federal Reserve Chairman Jerome Powell, whose refusal to lower bank lending rates puts a lid on economic growth. The broadside described above is, in fact, attributable to President Jimmy Carter and his Treasury Secretary G. William Miller, who engaged in an almost identical campaign 45 years ago to pressure Fed Chairman Paul Volcker to stimulate economic growth by loosening the central bank’s grip on money supply, thereby reducing interest rates.
That two U.S. Presidents—one a Democrat, the other a Republican—elected nearly 50 years apart would have virtually the same spat with the Federal Reserve Chairman over interest rates speaks to the intractability of America’s class struggle, as well as a morbid symptom of monopoly capitalism.
Stagflation, the coupling of inflation and low, or stagnant, growth, has returned.
Apropos of the proverbial broken clock, Trump, in his typically loutish manner, raises the exact same question as Carter in his relentless harangue of Powell’s money-tightening policies: If the Federal Reserve’s mandate is to strike an equilibrium between low unemployment and low inflation—or between workers and investors in other words--why does its monetary policy fixate myopically on prices but not job growth?
To answer that question, we’ll need to do a quick review of the last half-century.
To be sure, inflation is a problem for everyone but it is especially loathed by investors who see rising prices as a clear and present danger to their profit margins. If, for instance, a bank lends $1,000 for home repairs but inflation is running at 10 percent annually, that means that the loan principal is reduced to $900 in real terms. When Carter appointed Volcker as chairman of the Federal Reserve in 1979, inflation was rising at a pace of about 1 percent per month.
Volcker’s shock therapy effectively doubled the interest rate at which the central banks loaned money to commercial banks—known as the Federal Funds rate—to a historic high of 21.5 percent, triggering what was at the time the worst economic downturn since the Great Depression.
In Volcker’s obituary, The New York Times wrote in 2019:
“As consumers stopped buying homes and cars, millions of workers lost their jobs. Angry homebuilders mailed chunks of two-by-fours to the Fed’s marble headquarters in Washington. But Mr. Volcker managed to wring most inflation from the economy.”
A similar slowdown in homebuying and consumer spending has triggered Trump’s ire. Volcker’s monetary policies strangled the goose that laid the golden egg—a robust manufacturing economy—and reset the global economy. That was, in fact, the point: Volcker’s monetary policy was intended to discipline workers’ whose aggressive labor and social movements—led by a radical Black Power movement—were gobbling up more than half of national income, or gross domestic product. Consider that in the years since 1980, the poverty rate has soared to historic highs, the number of employees belonging to a union has dropped, falling from almost 4-in-10 to 1-in-10, employees’ share of GDP has plummeted from about 51 percent to 42 percent and the Federal Funds rate hovered at about a quarter of one percent until the Fed began its attack on rising prices. Inflation that once ran at a clip of 1 percent per month inched along at roughly 1 percent per year until the pandemic.
All of these statistics reflect bankers’ power play intended to prop up asset prices while gutting wages, strengthening creditors’ position in the marketplace at the expense of employees who are left increasingly dependent on high-interest debt to get by. This culminated in the 2008 collapse of the predatory subprime mortgage market—which disproportionately targeted African American and Latino borrowers-- leading to the Great Recession, which surpassed the Stagflation era as the worst financial crisis since the Great Depression.
To this day, there’s no consensus on what causes inflation, and indeed there are myriad global examples of skyrocketing inflation in a low-wage or high unemployment environment. The Marxist economist Richard Wolff attributes inflation to price gouging by corporate executives to capitalize on what they perceive as even the tiniest increase in consumer purchasing power.
What everyone agrees on, however, is that if you kill jobs and gut wages, prices will surely drop because no one can afford to buy anything. Herein lies the seed of our national discontent in the neoliberal era: Since the Carter administration, the federal government has doggedly pursued austerity policies, or what Reagan termed “supply-side” economics, which are, in essence, the direct opposite of Keynesianism in that they do not invest in jobs and raise wages, but divest in jobs and gut wages. The ensuing victory for investors is a pyrrhic one: They cut their labor costs but in doing so they also slice into their customers’ buying power.
This illogic is very much on display today. After dropping interest rates to nearly zero following the Great Recession, the Federal Reserve began to raise interest rates in 2022 to combat inflation that had begun to rise significantly for the first time in two generations.
And yet both wages and the employment rate—the percentage of able-bodied adults who are attached to the labor market—are near historic lows and couldn’t possibly be the source of the post-pandemic bout of inflation. The most obvious culprit is the Fed’s decade-long policy of money-printing to help investors recover their losses that accrued to their over-speculation in the real estate market during the subprime real estate boom.
So why does Powell continue to sanction workers?
Trump is no advocate for the proletariat and his denunciation of Powell is purely for political reasons; it is not clear that his administration can withstand the anemic addition of 33,000 new jobs over a two-month period.
This also helps explain why Trump fired the director of the Bureau of Labor Statistics following the release of a disappointing July jobs report last week. With no good options, Trump likely plans to manipulate the monthly jobs report but corrupting statistics is hardly new for the White House. The Reagan administration revised the methodology for calculating unemployment to exclude discouraged workers, and the Biden administration simply ignored two consecutive quarters of negative growth—the standard for recession for decades—to declare the economy a success.
Try as he might, however, Trump’s efforts to redefine reality will be as futile as Biden’s or Carter’s. It doesn’t add up: the simple irreducible truth is that over a span of roughly 50 years, the wealthiest 1 percent has capsized what was the singular achievement of the post-war Industrial Age, which is the creation of the American “middle class” of prosperous workers.
Jon Jeter is a former foreign correspondent for the Washington Post. He is the author of Flat Broke in the Free Market: How Globalization Fleeced Working People and the co-author of A Day Late and a Dollar Short: Dark Days and Bright Nights in Obama's Postracial America. His work can be found on Patreon as well as Black Republic Media.
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