The Federal Reserve chair has finally completed his “dovish” pivot. Speaking in Jackson Hole, Wyoming, the site of an annual get-together of central bankers, Jerome Powell effectively put an end to the cycle of monetary austerity that started in March 2022. “The time has come” to cut the Fed’s benchmark interest rate as early as September, he proclaimed.

In his speech on Friday, Powell explicitly acknowledged what has come to be known as the “long transitory” view of inflation: it was the slow reversal of pandemic-induced distortions of supply and demand, in conjunction with war-related effects on energy- and commodity markets, that was chiefly responsible for bringing key consumer price growth indices and overall inflation back down to 2.9 percent on a year-on-year basis.

Raising the federal funds rate — the rate at which banks with interest-bearing reserve accounts at the Fed lend each other money (their excess reserve balances) overnight and which effects borrowing cost throughout the US and global economy — from 0.25% to a twenty-three-year high of 5.50% and maintaining it at that level for over a year had contributed to this disinflation by “moderating’” aggregate demand, Powell noted. But the labor market was no longer a “source of elevated inflationary pressures.”

Part of the problem is that the primary transmission mechanism at work in the “moderation” is frustratingly indirect: it involves weakening job and wage growth through tighter financial conditions for firms, which respond by reducing operational expenditures (mainly wages), in turn dampening household expenditure and thus overall demand. This is a painful, grinding process. Powell understands this perfectly well. At a previous installment of the Jackson Hole symposium, he had signaled his willingness to cause a recession and to “bring some pain” for households and firms.

Ultimately, this will do the job — in the same way a baby will cease crying if shaken long enough. While hiking rates didn’t “silence” the US economy, it is clearly a needlessly circuitous and destructive way to fight an inflation that Powell himself acknowledges to be transitory. This is perhaps counterintuitive, since, in spite of the tightening, job growth has been very robust, thanks in part to both the Joe Biden stimulus (the American Rescue Plan Act) and the Inflation Reduction Act (IRA). Even accounting for recent downward revisions, 174.000 jobs were added per month between the months of March 2023 and 2024.

The surge of renewable energy investment unleashed by the IRA alone is likely responsible for creating over 334.000 jobs in the clean energy sector since August 2022. But there is reason to believe that Powell’s approach has dealt this process some damage. This is because green investment is particularly “rate-sensitive.” Like in every other manufacturing project, capital is as important a factor as labor and supplies. But green energy projects are more capital-intensive because they tend to trade lower operating costs (the input into wind farms and solar plants is “free”) against higher (in relative terms) up-front costs.

By one estimate, 70 percent of the expenditure for an offshore wind farm derives from capital costs, compared to 20 percent with a gas turbine plant. This means that the vast majority of IRA-related projects require a lot of debt-financed spending up front. As the cost of the debt increases with higher interest rates, so does the levelized cost of energy (LCOE), a measure of the average cost of producing a unit of energy (kilowatt- or megawatt-hour) over the lifetime of the plant. And it does to a greater degree with renewables, the swift adoption of which is premised on them being cheap and profitable for investors.

As a result, a lot of the much-needed expansion in renewables capacity and storage — which is highly time-sensitive given the escalating effects of the climate crisis — is offset until borrowing costs adjust to the point where new projects become viable. What is more, while rates are high, the larger and better capitalized firms can gain a higher market share. Their deeper balance sheets also make it easier to accept higher borrowing costs now in the hope of refinancing these loans at lower rates later. The concentration of market power in the renewables sector would have all the usual implications for consumer welfare and innovation, the latter being seen as key to the energy transition.

At the domestic level, then, it is important to appraise the effects of the Fed’s monetary austerity by considering where incomes, employment, and investment growth, as well as the growth of renewable energy and storage capacity, could have been. The question is, how would things have differed if a high-pressure economy had been allowed to persist for longer, and if the adverse effects of higher prices on real earnings had been addressed by other means?

As worrying are the global effects of the Fed’s belated pivot. Powell’s decision comes in the aftermath of major convulsions in financial markets, following weaker-than-expected economic data in the United States and the unwinding of the so-called yen carry trade. This global sell-off had in turn come after divergent rate decisions by the Bank of Japan (BOJ) and the Fed, with the former unexpectedly deciding to hike its own interest rates in order to stave off pressure on the yen.

It is perhaps telling that the ensuing blame game revolved largely around whether the Fed or its counterpart in Tokyo was guilty of committing a “policy error”: Powell by “falling behind the curve,” or Kazuo Ueda by allowing the all-important yen/dollar exchange rate — which due to the BOJ holding on to ultraloose monetary policy despite rising domestic inflation (putting downward pressure on the yen) in tandem with the aggressive tightening of the Fed (furthering dollar appreciation) had risen above the psychologically important level of 150, thus making imported goods more expensive for an import-dependent country — to deteriorate to the point that adjustment was inevitable.

What is obscured in this conversation, however, is the fact that very few countries are like Japan. Most nations lack the ability to conduct (relatively) independent monetary policy. The vast majority of countries do not have reserve currency in which liquid financial assets are denominated and which therefore can be used to store the proceeds of trade and financial transactions. These countries’ economic fortunes and short-term financial, political, and social stability are invariably tied to the macroeconomic trends and thus the monetary policy of the United States — with dire consequences.

The strengthening of the dollar and global interest rates (other central banks, in addition to responding to inflationary pressures of their own, having to follow the Fed’s policy to maintain their respective dollar exchange rates) has entailed escalating debt-servicing  and import costs and financial and political instability for developing countries already vulnerable to conflict and climate disruption. Several countries have spiraled into currency and debt crises and remain in turmoil.

All of this could be categorized as the latest manifestation of what is called central-bankism: once drab bureaucratic functionaries who, in the preneoliberal era, ran what amounted to check-cashing agencies for national treasuries, central bankers like Powell or Ueda are now the resplendent agents of world history, whose every word is of global systemic and political import and whose meticulously scripted press conferences weigh on the minds of financial analysts like a dull nightmare. At the apex of the global monetary hierarchy, Powell (a lawyer turned asset manager) is the epitome of the process Fernando Pessoa termed the “Caesarization of the accountant.”

By responding to what were largely supply-shock-induced price rises with reckless monetary austerity, the United States has once again shirked its hegemonic duties in the global financial realm — as it did with the Volcker shock and, more calamitously, during the interwar period. Today this failure is compounded by the severity of the climate crisis and the need to decarbonize. The developing world, too, is in a more vulnerable position than it was in the 1980s, with overall debt levels far higher and vulnerability to climate disruption further undermining its financial prospects.

More than anything, what this all reveals is the absence of a responsible stewardship at the head of the global financial (non)system. It once again raises the question of monetary policy cooperation, akin to the 1985 Plaza Accord, where the United States and other large economies agreed to adjust trade and financial imbalances and to allow the dollar to depreciate. But the possibility of a new agreement is remote. In its absence — and in the absence of a wholesale reform of global trade and financial institutions — billions of people worldwide, largely in the developing world, will bear the consequences of monetary austerity and the stalling green transition.