As should shock no one, Federal Reserve Raises Benchmark Rate as Inflation Approaches 2 Percent Target. As I’ve noted many times before, the 2 percent target is a joke. First, it is a number that Alan Greenspan pulled out of the air (perhaps in a tight cavity located at the bottom of his torso). Second, the Fed increasingly treats that inflation target like a ceiling. Since 2009, US core inflation has been consistently below 2 percent. It is only for the last year that it has been slightly more than 2 percent.
Who the Federal Reserve Works For
It’s clear who the Federal Reserve is working for. Having a 4 percent inflation target would make us no more likely to suffer from high inflation, much less hyperinflation. Given that our current 2 percent target is not based on any evidence or theory, it can’t be said to be better in economic terms. The only thing you can say about the 2 percent target is that it is good for people who have a lot of money. If we had a 4 percent inflation target, it would mean that people with a lot of money would effectively be taxed a little bit on it. But it would also mean that millions more people would have jobs.
That’s a fair trade-off. The rich would be slightly less rich. But in exchange, millions of poor people would have jobs and thus would not be nearly as poor (or poor at all). Our libertarian friends would now like to play the smallest violin in the world for people on fixed incomes. But those on Social Security wouldn’t have to worry, because it would simply be adjusted for inflation. It would harm those few remaining people retired on defined benefit plans. Those are all but gone, so we wouldn’t have to worry about them for long. And for the time being, we could help them out too. (Although note: they would get Social Security too, so we aren’t dealing with poor people.)
It’s the Rich, Stupid!
So the Federal Reserve is working for the rich. Remember that because it’s scary. Regardless of who controls the government — Democrats, Republicans, or a mix — the Federal Reserve is there to make sure that the rich stay rich. Yes, it’s true that if there are more liberals on the Fed OMC, things are better for the people. Lael Brainard, for example, is fighting the good fight. But as an institution, the Federal Reserve is not on the side of the people.
Economy Isn’t Doing As Well as Fed Thinks
But what’s interesting about this rate rise is that it shows that the Fed thinks the economy is doing just fine. I hear the words “full employment” a lot. This is something that I just don’t understand. The employment-to-population ration for people 25 to 54 years old was 79.9 percent right before the economic crash of 2008. (It was 80.3 percent a year earlier.) Today it is 78.3 percent. There’s no reason to think that 1.6 percent fewer Americans want to work than they did nine years ago. Everyone’s focused on the 4.7 percent U-3 unemployment rate. But clearly, it isn’t taking everything into account. Unemployment could go way down before inflation starts accelerating.
Of even greater concern is that the Fed doesn’t seem to be concerned about what’s going on in Washington. We all know that the Republicans’ new healthcare law is estimated to make 24 million people uninsured compared to those who have insurance now. But there has been very little talk about its broader economic effects. The truth is that it could cause catastrophic damage to the healthcare and insurance industries. And this alone could throw the world economy into recession. That’s one bill — one that doesn’t even deal with the economy explicitly.
Danger of Rate Rise
A problem with the Fed’s eagerness to raise rates has always been that the risks are unsymmetrical. If they don’t raise rates, inflation might tick up a bit. But more important, the Fed would have no difficulty dealing with this problem (in as much as it would be a problem). If they do raise rates and the economy falls into recession, the Fed is pretty much impotent (as we have seen over the last 9 years).
Now I’m not saying that this interest rate increase is going to hurt the economy. But I do think that anything the Republicans manage to do in terms of the economy will be to make things much worse for working people. But the Fed is just sitting back, acting like everything is just like it has been. It isn’t. Of course, the rich will be fine. And that is, after all, the only thing that the Fed truly cares about.