Federal Reserve hikes interest rates to curb inflation, labor costs in focus

In September, the Federal Reserve Board, led by Chairman Kevin Warsh, increased short‑term interest rates to address inflation and labor costs. The move follows a long tradition of using rate hikes to curb inflation, a strategy that dates back to President Nixon’s wage‑price controls in the early 1970s. The policy aims to reduce aggregate demand, slow wage growth, and ultimately lower prices.

The Fed’s rate hikes have historically produced measurable effects. Between mid‑1977 and mid‑1981, the Consumer Price Index rose at an annual rate of more than 10%. By mid‑1981, the Fed had pushed the Federal Funds Effective Rate above 20%, keeping it above 10% until August 1982. The policy helped bring inflation down to below 3% in the mid‑1980s, while unemployment peaked at 10.8% at the end of 1982.

Today, labor costs per unit of output have averaged 2% over the last four years, running at 1.5% in the past year, according to The Financial Times. The share of national output going to labor has fallen to 53% of GDP, a decline from the 61‑66% range of the 1960s. The Fed’s recent rate hike is expected to curb inflation and stabilize labor costs for workers and businesses alike.

Read the full story at dollarsandsense.org.