Interest rate hikes turn the aff – the Fed would slam the brakes on the economy which guts the impact of the plan

The most important day-to-day lever that policymakers use to adjust the economy’s level of aggregate demand is monetary policy—the decisions made by the Federal Reserve about the level of interest rates. When the Fed cuts rates, this can potentially spur aggregate demand by inducing businesses and households to borrow more for investment and consumption (though, as we note below, the effect of monetary policy is quite asymmetric, with interest rate cuts providing only a weak boost to growth while interest rate increases reliably slow growth). Conversely, when the Fed raises rates, it reduces aggregate demand by making this borrowing more expensive. The key virtue of monetary policy actions is that the Federal Open Market Committee (FOMC)—the body that changes interest rates—is a much faster-moving entity than the U.S. Congress and the executive branch, who together control fiscal policy decisions. Perhaps surprisingly, the importance of monetary policy is not primarily due to its being a particularly effective job-creation mechanism when aggregate demand is slack. In fact, interest rate cuts have a hard time gaining purchase on a slack economy; the metaphor describing this is that rate cuts that induce, but cannot compel, businesses and households to spend more are like “pushing on a string.” But interest rate increases are extremely effective in slowing aggregate demand growth. One can obviously pull on a string with decent effect. This means that when it comes to spurring economic growth, the Fed’s key role is intentional inaction on interest rates. By not raising rates, they allow the economy’s growth to continue unabated. In times when this growth is too slow, this obviously provides very little boost. But during times when this growth has been healthy (as in the late 1990s), Fed forbearance on raising rates has allowed for rapid growth. Because monetary policy can effectively slow growth, and because the Fed is autonomous and fast-moving relative to other policymakers, the Fed essentially has veto power over efforts to spur aggregate demand growth through other policy changes. If, for example, Congress and the president passed a large package of tax cuts and spending increases to boost the economy, but the Fed thought the economy had already reached full employment or that such fiscal moves threatened to raise inflation, the Fed could block the effects of these tax cuts and spending increases with interest rate hikes. They have certainly done so in the past, most notably in the early 1980s. What this means in today’s economy is simply that the Federal Reserve controls the economy’s brake. Unless they can be convinced to stay off this brake until the economy hits genuine full employment, any job-creation strategy is likely to fail as a way to actually boost the overall stock of jobs available in the economy. This means that those worried about American labor market health must wrestle seriously with the power of the Fed to short-circuit job creation and engage the fight to convince the Fed to aggressively pursue full employment by holding off on rate increases before wage and price inflation make them absolutely necessary.