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.”