Former Labor Secretary Warns of 'Financial Chaos' After Interest Rate Hike

Robert Reich, the former Department of Labor secretary, warned on Wednesday of "financial chaos" following the interest rate increase by the U.S. Federal Reserve.

"Once again, interest rate hikes are going to fall hardest on low-wage workers and the poor — the same people who have already been hurt the most by rising prices," Reich said in a tweet on Wednesday afternoon. "Higher rates could also imperil more banks, and risk even more financial chaos. The Fed is playing with fire."

The tweet by Reich, who is professor of Public Policy at the Goldman School of Public Policy at the University of California, Berkeley, comes shortly after the Federal Reserve announced an increase in interest rates of 25 basis points (a quarter-point or .25 percent).

"The U.S. banking system is sound and resilient," the U.S. Federal Reserve said in a statement. "Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.

"The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent."

While the Federal Reserve said that the banking system is "sound and resilient," many have speculated of larger economic impact following the collapse of Silicon Valley Bank and Signature Bank. Newsweek previously reported on a number of banks that had share trading halted in the days following the collapse of Silicon Valley Bank. Many of the banks were placed under a Volatility Trading Pause, which happens when there is a large change in share price.

This month, Massachusetts Democratic Senator Elizabeth Warren criticized Federal Reserve Chair Jerome Powell following the collapse of Silicon Valley Bank, saying, "My views on Jay Powell are well known at this point. He has had two jobs: one is to deal with monetary policy, one is to deal with regulation. He has failed at both."

In addition to his tweet, Reich published an opinion piece in The Guardian on Tuesday in which he wrote: "The global financial system is facing a crisis of confidence. Which makes this week's meeting of America's central bankers critically important."

"Higher rates could imperil more banks, especially those that used depositors' money to purchase long-term bonds when interest rates were lower, as did Silicon Valley Bank," Reich wrote. "That means that raising interest rates could cause more runs on more banks. The financial system is already shaky."

Newsweek reached out to Reich via email for further comment.