Memo to Fed: Don’t Raise Interest Rates

Memo to Fed: Don’t Raise Interest Rates

Memo to Fed: Don’t Raise Interest Rates

The Fed needs to stop worrying about stemming inflation that doesn’t exist and keep the focus on the jobs we need.

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The Federal Reserve governors really want to raise interest rates. For months, they’ve signaled that they are likely to start gradually raising them this fall. Interest rates have been near zero since the “Great Recession.” Unemployment is down. The economy is setting new records for consecutive months of growth. Raising rates would declare that we’re back to normal.

There’s only one problem: The economy may be recovering, as the White House and many economists tell us, but most Americans aren’t. If the Fed raises interest rates, it will slow an economy that is already growing too slowly and cost jobs in an economy that already produces too few jobs. That will, as Nobel Prize–winning economist Joseph Stiglitz warned in a news conference outside of the Fed’s annual retreat in Jackson Hole, Wyoming, add to our already extreme inequality.

So why raise rates? The Federal Reserve has a mandate—the so-called dual mandate—to sustain maximum employment at stable prices. The Fed has made 2 percent inflation its arbitrary target (a little inflation is needed to guard against slipping into deflation—declining prices that lead the way to recession or worse). But every measure of inflation is below that target. So why even think about raising rates?

Historically, the Fed — dominated by Wall Street’s perspectives and the concerns of creditors not debtors — has been far more concerned about inflation than about employment. It prides itself, as former chair William McChesney Martin put it, that it has the independence to “take away the punch bowl just when the party gets going.”

Last weekend at Jackson Hole, Federal Reserve Vice Chairman Stanley Fischer showed the extent of this bias. Fischer announced that there is “good reason” to anticipate rising inflation without being able to identify one. He admitted that overall price increases are barely above zero over the past year. Of course, the Federal Reserve prefers a “core inflation” measure that excludes more volatile food and energy prices. (Although, reality check, Americans don’t have the luxury of excluding food and energy prices from their budget). Even that core inflation, Fischer admits, is up only 1.2 percent over the past year; moreover, “we have seen no clear evidence of core inflation moving higher over the past few years.”

So why worry? Well, Fischer notes the official unemployment rate has declined from more than 10 percent to just above 5 percent . Tighter labor markets should lead to higher wages and rising prices. But they haven’t because labor markets aren’t actually tight. The percentage of working-age Americans with jobs hasn’t returned to pre-recession levels. Long-term unemployment remains high. Underemployment — people forced to work part-time who would prefer full-time — is widespread. And so, wages have been virtually stagnant and median household wealth continues to decline.

Moreover, Fischer admitted there is no sign that investors expect future increases in inflation. This isn’t surprising. The Congressional Budget Office just lowered its projection of U.S. growth for this year down to 2.0 percent. Canada, our largest trading partner, verges on recession. Europe is troubled. Asia is doing worse than expected. China’s slowing economy has led to a collapse in commodity prices. The rising dollar will make imports cheaper, driving down prices, and exports more costly, driving down growth. The recent stock market gyrations — with stocks down over the course of the year— also are likely to shake consumer confidence, at least among the less than half of Americans who hold any stocks at all.

So no inflation over the past year, no expectations of rising inflation in the future and rising pressure against growth and inflation. Why raise rates? Fischer explains with a statement that verges on an oxymoron: “[G]iven the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” Say what? Yes, eventually the forces holding down growth and inflation will dissipate further. But eventually isn’t exactly looming. All signs today point down, not up.

Fischer tells us that the absence of any sign of inflation is no reason not to act. “[B]ecause monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.”

The Fed’s bias is just one of many ways the rules are rigged against workers. It used to be that when the economy hit full employment and wages began to rise, the Fed would “take away the punch bowl.” Now the Fed stops the party before the invitations to the party are even printed.

Notably absent from Fischer’s discussion was one reason the Fed ought to be concerned about continuing near-zero interest rates: Essentially free money encourages gambling. Fortune 500 companies, for example, have taken on debt while spending almost $2 trillion on stock buybacks since 2009, hiking share prices (and larding chief executive bonuses). More stocks are being bought on margin (with borrowed money) than ever. And as we learned in 2008, bursting bubbles can wreak real destruction.

The Fed’s dilemma is that low interest rates are virtually the only thing boosting the economy. Here the dysfunctional right-wing ideologues that paralyze Congress and block meaningful stimulus are particularly to blame.

The stark reality is that Congress should pass a large, bold, long-term initiative to rebuild this country. Our decrepit infrastructure is more than an international disgrace; it is an increasing threat to people and economy alike. Aged pipes leak and collapse, wasting water, spewing out methane. Bridges collapse; roads crater. Our mass transit is utterly inadequate. Our broadband is no longer competitive internationally. Public schools are aged and overcrowded. The list can go on. The American Society of Civil Engineers estimates that it would take over $3.6 trillion by 2020 simply to repair our infrastructure and bring it up to safe standards.

A bold initiative would put people to work, increase growth, generate revenue and make the economy more efficient. With interest rates near zero, it could be financed easily. Full employment would finally lift wages. And then the Fed might actually be able to raise rates gradually. If we had a sensible fiscal policy and a greater commitment to full employment, we would not need to sustain this extreme monetary policy. Until then, the Fed governors should stop worrying about stemming inflation that doesn’t exist and keep the focus on the jobs we need.

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