Fed Interest Rate Hikes Target Labor, Not the Actual Causes of Current Inflation
Source: Arthur MacEwan. "Interest Rate Increases Are About Disciplining Labor." October 6, 2026. jacobin.com
The Gist
The author argues that when the Fed raises interest rates to fight inflation, it's really just a tool to weaken workers' bargaining power rather than an effective fix—because today's inflation is actually caused by Trump's tariffs, the Iran war, and deportations (not by high wages), and the Fed can't or won't touch those real causes. So instead, policymakers settle for squeezing workers through job losses and stagnant wages, since that's the only lever they're willing to pull.
Conclusion
The Federal Reserve's interest rate increases will do little to curb the current inflation because they target wage-driven demand, which is not the real cause; instead, these hikes primarily function to weaken labor's bargaining power, which is why Washington supports them despite their limited anti-inflation efficacy.
Premises
- Historically, Washington's anti-inflation policies (wage-price controls in the 1970s, Fed rate hikes since) have consistently worked by suppressing wages and employment, as officials have explicitly stated (e.g., Weber's 'zap labor' comment, Powell's focus on wage growth).
- Labor costs are not driving current inflation: unit labor cost growth (1.5-2%) is below the inflation rate, and labor's share of GDP has fallen to 53%, the lowest since WWII.
- The actual drivers of current inflation are supply-side shocks from Trump administration policies: the Iran war raising oil/diesel prices, tariffs raising import and input costs, and mass deportations causing labor shortages in construction, meatpacking, and agriculture.
- Two major demand-side inflation drivers—the government deficit from tax cuts for the wealthy and massive AI data center investment—are unlikely to be significantly curbed by interest rate hikes, since big tech firms are unlikely to slow data center spending and the deficit is politically entrenched.
- Since the Fed cannot alter supply-side causes and the administration won't change its policies (military action, tariffs, deportations), the only lever left for policymakers is suppressing labor via interest rates, even though this does not address the actual causes of inflation.
- Historical precedent (the early 1980s Volcker shock) shows that high interest rates can successfully reduce inflation by causing high unemployment and suppressing wages for over a decade, demonstrating the 'labor discipline' mechanism works even when not primarily addressing root causes.
Assumptions
- Policymakers' stated preference for interest rate hikes over addressing supply-side issues reflects a conscious or structural bias toward disciplining labor rather than genuine inflation-fighting incapacity.
- The relationship between employer wage costs and consumer prices is primarily the channel by which interest rates have historically reduced inflation, implying current rate hikes are modeled on that same (now less applicable) mechanism.
- Supply-side inflation drivers (tariffs, war, deportations) are treated as effectively exogenous/fixed because the administration lacks political will to reverse them, not because reversal is technically impossible.
- The structure of institutional power in Washington and the Fed consistently favors capital/business interests over labor, making 'zapping labor' a recurring policy default across different historical eras and administrations.