Fed’s Interest Rate Hikes Aim to Discipline Labor Amid Inflation

The Federal Reserve, led by Chairman Kevin Warsh, raised short-term interest rates in September 2023 in an attempt to curb inflation. While this move might have some impact, the primary drivers of the current inflation, such as supply chain disruptions, tariffs, and labor shortages, are unlikely to be significantly affected by higher interest rates.

Historically, the Fed has used interest rate hikes to discipline labor, a strategy that dates back to the 1970s when President Richard Nixon imposed wage-price controls. Economist Arnold Weber, who oversaw these controls, famously stated, 'The goal here is to zap labor.' This approach aims to weaken workers' bargaining power, leading to lower wages and reduced inflation.

The most extreme example of this policy was in the early 1980s when the Fed raised the Federal Funds Effective Rate to over 20 percent, leading to a 10.8 percent unemployment rate by the end of 1982. While this successfully reduced inflation, it also resulted in prolonged wage stagnation for many workers.

However, the current inflation is driven by factors beyond the Fed's control, such as the Trump administration's policies on tariffs, immigration, and military spending. These issues create supply shortages and increase costs, making it unlikely that interest rate hikes alone will resolve the problem.