Janet Yellen’s central bank is cautiously tiptoeing toward creating what it claims will be a healthy new normal—the Goldilocks economy that is “not too hot, not too cold.”
Toward that objective, the Federal Reserve once again raised short-term interest rates this week but only by a smidgen—a quarter of 1 percent. The Fed chairman intends to do the same again soon, hoping to restore a balanced financial system little by little.
But don’t hold your breath waiting for a genuine economic recovery, the kind that generates stronger growth, abundant jobs, and rising wages. The big bad wolf is still in the woods, still stalking the fragile global economy. Yellen has so far managed to keep things going (albeit slowly) while avoiding the full catastrophe.
The present danger is not price inflation or rising wages—the Fed’s usual reasons for tightening credit to slow down things. The imminent threat now is the wildly overpriced stock market, where wishful bulls keep buying more shares. Everyone knows a “correction” is overdue (the Standard & Poor’s 500 index is at 2,381). But if the Fed tightens too fast, it could trigger a massive sell-off, resulting in collapsing financial markets around the world.
So once again, the mysterious Federal Reserve is cast as the scapegoat and blamed by right and left for holding back prosperity. Yellen’s term ends next February, and we will soon be hearing political demands for a new central banker who will miraculously rescue the economy from the doldrums. President Trump will make the call.
I am a longstanding critic of the Federal Reserve and its privileged insulation from genuine political accountability. The central bank was created in 1913 to give bankers a preferential role in setting the government’s monetary policy. That undemocratic arrangement continues to distort and ignore the broader public interest. Banking and finance are not a private realm that deserves to be protected from public accountability.
But don’t blame Janet Yellen for the current dilemma. In the troubled circumstances created by the financial system’s collapse in 2008, the Fed was not the main obstacle to forceful corrective action; it was the elected government in Congress and the White House. In fact, Fed officials, in their awkward, hesitant way, not only introduced a variety of creative monetary tools to revive the economy but also tried to persuade the politicians to take more aggressive fiscal actions to promote a stronger recovery.