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Interest Rates

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fpa.inflation

I’m surprised the Federal Reserve hasn’t raised interest rates yet as it’s been rumored for a good year. But the time is coming, despite Janet Yellen doing some work to forestall it thus far. And it is a bad idea because not only is inflation not a problem, but the underlying economic factors that are creating problems for the middle class can’t even be addressed if we don’t raise rates, not to mention if we do. Robert Kuttner:

That said, even if the Fed kept interest rates at effectively zero for another year, it’s increasingly clear that monetary policy alone is not sufficient to get unemployment rates down to where they need to be—or to translate falling jobless rates into raises for workers. During the past few decades, there have been momentous changes in the structure of employment.

Unions are weaker than they have been since before the Wagner Act of 1935. The combination of outsourcing, union-busting, and the creation of part time, temp, contract, and on-demand jobs as the new normal means that a low nominal unemployment rate doesn’t produce the pressure for wage increases that it once did.

Plus, the Obama administration has colluded with the Republicans in believing that we need more deficit reduction. So liberal monetary policy collides with overly tight fiscal policy, as well as trade policy that will promote more outsourcing and export of good jobs.

In short, unless we get major reforms in labor markets, to protect workers from the on-demand economy, plus massive public investment to create millions of good jobs, whether monetary policy is a little tighter or a little looser won’t be a game changer. Still, raising rates eliminates one of the few sources of economic stimulus that we have.

The fact that inflation phobia has been consistently disproven by events for seven years has not stopped the monetary hawks. The fact that a progressive economist like Yellen has been prodded into embracing a rate hike is testament to the immense undertow of the conventional wisdom.

But inflation!!!!!!! It’s always 1978 for the economists.

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