Working people don’t have quite the same kind of friend on the Federal Reserve as they did when Janet Yellen was the chairwoman. But newly installed Chairman Jerome Powell has maintained the central bank’s bias toward full employment.
Yes, the Fed raised interest rates again this week, and signaled that it intends to push its overnight lending rate even higher over the next two years. Markets, analysts and headline writers considered this to be another hawkish move after nearly a decade of very low interest rates.
But the Fed has also taken further steps toward dovishness since the beginning of February, when Powell took over from Yellen. (The terms “hawks” and “doves” have been borrowed from political jargon that describes differences over war and peace. In monetary policy, hawks see high inflation as the greater evil and tend to favor higher interest rates, while doves prefer low unemployment and favor looser monetary policy.)
Consider the latest Survey of Economic Projections (SEP) from the individual (but anonymous) Fed policy makers, which marked another milestone of the central bank’s institutional evolution toward a commitment to achieving full employment. The policy makers’ median forecast for the longer-run unemployment rate fell again to an all-time low of 4.5%.
This, more or less, is the Fed’s estimate of “maximum employment,” which is one of the Fed’s three statutory obligations. (The other two are stable prices and moderate long-term interest rates.)
To show how far the Fed has come, in the first public SEP in January 2009, only one member of the Fed believed long-run unemployment could be as low as 4.5%. This means the average Fed policy maker is now as dovish as the most dovish member in 2009. And with the range of estimates stretching from 4.2% to 4.8%, the most hawkish member of the Fed today is more dovish than the most dovish member in 2010.
The dovish trend is also evident in the policy makers views about where the federal funds rate should be in the long run. Since 2009, the median forecast for interest rates has dropped from 4.25% to just under 3%. (It went up from 2.75% to 2.88% this past week only because Janet Yellen’s dot was removed from the board.)
There’s more good news in the SEP: The median forecast for the unemployment rate in 2019 and in 2020 dropped to 3.6%. And here’s the remarkable part: Inflation isn’t expected to accelerate much at 3.6% unemployment, even though it’s nearly a full percentage point below the long-term rate.
In truth, no one knows just how low the unemployment rate can go before “bad things” start to happen. But Powell seems open minded to the possibility that, in the low-inflation world we find ourselves in, it could be very low.
In testimony to Congress in February, he said it’s possible that it could be as low as 3.5%. Which would be the lowest since 1969.
For much of its history, the Fed has been a hawkish institution that kept a watchful eye out for the capitalists’ interests. The goal was always to keep profits high and wages low. The Fed has succeeded at that task beyond anyone’s dreams — the share of output going to labor is near a record low — but has found that this sort of economy leaves most of the people to just scrape by.
Filling the punch bowl
In the immortal words of long-time Fed Chairman William McChesney Martin (whose capitalist bona fides included a stint as president of the New York Stock Exchange): “The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
What Martin really meant was that the Fed should remove the punch bowl as soon as workers were getting a taste.
That’s the way the business cycle works: After a recession, profits soar even while millions of people are still without work. The Champagne is flowing, but only the capitalists can partake. Then there’s an all-too-brief sweet spot as the unemployment rate falls and incomes rise for both capital and labor. The workers are finally joining the party, but millions are still left out in the cold.
But finally the unemployment rate falls so far that even marginalized people can find work — anyone can get past the bouncer and into the party, if not into the VIP room. Labor becomes scarce, wages are bid up, and it’s time for the Fed to remove the punch bowl before the workers drink up all the Champagne.
This is still the Fed’s basic worldview: That asset prices can soar 30% a year without the Fed’s batting an eyelash, but workers’ getting a 9-cent raise cannot be tolerated. Powell said that the Fed would know that we’ve reached full employment when wages start to really rise (and presumably that’s when the punch bowl should be removed).
What has changed at the Fed is a willingness to let the party go on just a bit longer. Let’s hope the Fed continues to evolve, because getting everybody inside the party is our most pressing economic and political issue. Everyone needs to have the opportunity to work and to enjoy at least a sip of the good things in life.