No, We Don’t Need Higher Interest Rates

The press is fairly slavering for the Federal Reserve to raise interest rates. You can hardly read an item in the business pages without some commentator declaring that, at last, the unemployment rate is low enough and the growth rate high enough that the Fed can tighten money… and choke off further progress. Hosannas!

But the commentators have to strain to tell us how good things are. Yes, wages are up this year and unemployment is down, but as EPI’s comprehensive report makes clear, these gains have only begun to reverse several decades of rising inequality.

Why does the financial community want higher interest rates? So that banks and other creditors can make more money, of course. And to head off inflation that for the moment is mostly imaginary. And to keep down worker pressure for higher wages. Just what you’d expect of financial elites.

The core inflation rate is about 2.3 percent, a hair above its average in recent months. The Fed could easily let this recovery go on still longer, to produce even more wage gains. Wages triggering inflation is not the only option—they can also come out of profits.

The percentage of workers unemployed longer than six months is improving, but still not down to pre-recession levels. Likewise the percentage of the population with jobs.

Janet Yellen, the Fed chair, deserves a medal for fending off this pressure for as long as she could. Yellen is the first liberal to hold the job since renegade banker Marriner Eccles ran the Fed under FDR, and engineered low interest rates to help finance World War II.

Yellen has brilliantly bobbed and weaved, in the manner of Fed chairs, suggesting that the Fed would surely raise rates sometime soon, but not quite yet. But the pressure among other Fed governors and regional Fed bank presidents has reached the point where even Yellen has had to join the inflation-hawk camp, lest she get outvoted on the Fed’s policymaking Open Market Committee—a fate that Fed chairs detest. So Yellen herself has now signaled that the Fed will indeed raise rates at its policy meeting Wednesday.

Please recall that Yellen got the job only because progressives in the Senate led by Elizabeth Warren were able to block Larry Summers. As a testament to the power of the dead hand of economic orthodoxy, the usual suspects persuaded Obama to name as deputy Fed vice chair Stanley Fischer, a paladin of financial deregulation and tight money. The austerity caucus at the Fed keeps growing.

This brings us to President Trump, who found to his shock that the economic statistics were not fake after all—when they reported the good news the economy had generated 235,000 jobs last month, causing the unemployment rate to tick down to 4.7 percent. Of course, in the boom of the late 1990s, unemployment went below 4 percent and could again.

Trump will soon have three seats to fill at the Fed (out of seven), and he probably will replace Yellen when her term as chair expires early next year. What will Trump do?

Normally, a conservative Republican president would appoint other conservatives, who are both inflation-phobic and pro-deregulation. But if Trump is shrewd, he will look to inflation doves, so that he can enjoy more good reports of rising growth and declining unemployment.

Unfortunately, Trump’s banker chums, such as his economic policy director Gary Cohn, late of Goldman Sachs, and his Treasury Secretary Steve Mnuchin, also want more deregulation.

Loose money and financial deregulation is not a good combination. It leads to bubbles—of the sort that crashed the economy in 2008.

The Yellen regime at the Fed has been a splendid exception to the norm, because it has combined easy money with tight regulation, allowing the real economy to recover without a resurgence of abuses.

It is a far less dramatic story than all of the Trump outrages that dominate the news, but the competence, progressivism and integrity of the Fed under Janet Yellen are one more thing that we are going to miss.


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