Will the Fed Destroy Our Fledgling Recovery?

Janet YellenThe monthly jobs report came out last Friday and it was pretty good. Dean Baker wrote, October Jobs Growth Pushes Unemployment Rate Down to 5.0 Percent. And you know what that means: the inflation is coming! Because, as we all learned in Econ 101, 5% unemployment is full employment. Of course, that actually means nothing. But that doesn’t mean that the Federal Reserve isn’t going to step in and slow the economy to stop even the possibility of inflation.

The unemployment rate may be down, but that doesn’t actually mean that much. As Baker noted, “The labor force participation rate is actually down 0.4 percentage points from its year-ago level.” The employment to population ratio of people between the ages of 25 and 54 was 80.0% in January of 2008. Today, it is 77.2%. So we have a low unemployment rate because lots of people in the prime working age range are simply not trying to find jobs because they aren’t readily available.

But what does that matter?! The Federal Reserve wants to increase interest rates because rich people think they might lose a little money due to inflation. So what is inflation currently? The core inflation rate right now is 1.89%. It has been almost three years since inflation has been above 2% — and then just for a single month. You have to go back a year further to find inflation above 2% for several months. How high? It peaked at 2.31%. And then you have to go back to November 2008 to be above 2% again.

They reason I bring this all up is because the Fed’s inflation target is supposed to be 2%. But it sure doesn’t look like that. It looks like the Fed has a 2% inflation ceiling. If we had a 2% inflation target, we would think years of less than 2% inflation would be followed by years of more than 2% inflation. But that’s not the way the Fed works, apparently.

In addition to suppressing workers’ wages and keeping millions of others out of work, the Fed could be setting the stage for a Republican president in 2017.

Dean Baker’s conclusion is pretty much what any person in the normal economy would think, “In short, this is a much more positive report than we saw in the prior two months. However, there is much in the report that indicates there is a still a large amount of slack in the labor market.” In other words: there is no fear of inflation. Workers aren’t making more money. And the power elite think we need to stop this from happening out of fear that modest inflation might happen.

Matt Yglesias wrote a very good rundown of what everyone should know, We Could Have an Economic Boom This Winter — If the Fed Doesn’t Screw It Up. That’s the thing that is so horrible about the Federal Reserve. It is an institution by, for, and of the power elite. It is supposed to have a dual mandate: keep inflation low and employment high. But it never much frets about employment. For the last five years, it has been looking for any excuse to raise interest rates. It isn’t the case that the Fed is monitoring the economy and deciding what to do. It wants to raise interest rates and it is simply looking for an excuse to do it.

Chad Stone, the chief economist at the Center for Budget and Policy Priorities tweeted out what should be obvious, “Three more months of jobs reports like today’s and maybe the Fed should start considering the possibility of raising rates.” That would be the reasonable thing. But instead, the Fed acts like an AA member standing at a free bar, “Gimme an excuse!”

In addition to suppressing workers’ wages and keeping millions of others out of work, the Fed could be setting the stage for a Republican president in 2017. Sure, there is some risk of a moderate rise in inflation if the Fed doesn’t raise interest rates. But there is a far bigger risk that it will tank the economy if it does. But that latter possibility doesn’t much concern the Fed, because it isn’t likely to hurt them or anyone they know.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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