The Federal Reserve definitely seems to be gearing up for monetary tightening, even though inflation remains below target. And I agree with Ryan Avent at The Economist: If this happens, it will be a big mistake – just as European Central Bank President Jean-Claude Trichet’s decision to raise interest rates in Europe in 2011 was a big mistake, just as the Swedish Riksbank’s early rate hike was a mistake, just as Japan’s rate hike in 2000 was a mistake.
And you would think that Fed officials would understand that. In fact, I suspect they do, and are somehow letting themselves be bullied into doing the wrong thing anyway. More on that in a minute.
First, on the policy substance: The point is not that we know that the American economy is still far from full employment. The question is one of weighing the risks. The fact is that the damage the Fed would do if it hikes rates too soon vastly outweighs the damage it would do if it waits too long.
Suppose the Fed does the latter. Well, inflation ticks up, but probably not by much. It would be annoying and unpleasant, and no doubt there would be congressional hearings berating the Fed for debasing the dollar. But it wouldn’t really be a big problem.
Suppose, on the other hand, that the Fed raises rates, and it turns out that it should have waited. This could all too easily prove disastrous.
The economy could slide into a low-inflation trap in which zero interest rates aren’t low enough to turn things around – which has happened in Japan and is pretty clearly happening in the eurozone. Also, there is now very strong reason to suspect that a protracted slump could inflict large losses on the American economy’s future productive capacity.
If someone tells you that these risks aren’t that big, consider this: We used to be told that a 2 percent inflation rate was enough to make the risks of hitting the zero lower bound minimal – less than 5 percent in any given year. But of the roughly 20 years since inflation dropped to around 2 percent, six years – or 30 percent of the time! – have been spent in a liquidity trap. This means that we should be very afraid of missing our chance to escape from the trap out of an urge to normalize monetary policy too soon.
The thing is, I know that Fed Chairwoman Janet Yellen, Vice Chairman Stan Fischer and the Fed staff know this. They’re very familiar with recent history and all the relevant economic analysis. So why do they seem to be rhetorically preparing the ground for early rate hikes?
My guess – and it’s only that – is that they have, maybe without knowing it, been bludgeoned into submission by the constant attacks on easy money. Every day, the financial press, as well as many blogs and cable financial news outlets, feature people warning that the Fed’s low-rate policy is distorting markets, building up inflationary pressure and endangering financial stability. Hard-money arguments, no matter how ludicrous, get respectful attention, and condemnations of the Fed are constant.
If I were a Fed official, I suspect that I would often find myself wishing that the bludgeoning would stop, at least for a while, and that perhaps I would begin looking for an opportunity to prove that I’m not an inflationary money printer.
So my guess is that the Fed, given an improving job market in the United States, is strongly tempted to buy some peace by raising rates a little just to quiet the critics for a few months.
But the objective case for a rate hike just isn’t there. The risks of premature tightening are huge, and should not be taken until we have a truly solid recovery that includes strong wage gains and inflation clearly on track to rise above target.
We’re not backing down in the face of Trump’s threats.
As Donald Trump is inaugurated a second time, independent media organizations are faced with urgent mandates: Tell the truth more loudly than ever before. Do that work even as our standard modes of distribution (such as social media platforms) are being manipulated and curtailed by forces of fascist repression and ruthless capitalism. Do that work even as journalism and journalists face targeted attacks, including from the government itself. And do that work in community, never forgetting that we’re not shouting into a faceless void – we’re reaching out to real people amid a life-threatening political climate.
Our task is formidable, and it requires us to ground ourselves in our principles, remind ourselves of our utility, dig in and commit.
As a dizzying number of corporate news organizations – either through need or greed – rush to implement new ways to further monetize their content, and others acquiesce to Trump’s wishes, now is a time for movement media-makers to double down on community-first models.
At Truthout, we are reaffirming our commitments on this front: We won’t run ads or have a paywall because we believe that everyone should have access to information, and that access should exist without barriers and free of distractions from craven corporate interests. We recognize the implications for democracy when information-seekers click a link only to find the article trapped behind a paywall or buried on a page with dozens of invasive ads. The laws of capitalism dictate an unending increase in monetization, and much of the media simply follows those laws. Truthout and many of our peers are dedicating ourselves to following other paths – a commitment which feels vital in a moment when corporations are evermore overtly embedded in government.
Over 80 percent of Truthout‘s funding comes from small individual donations from our community of readers, and the remaining 20 percent comes from a handful of social justice-oriented foundations. Over a third of our total budget is supported by recurring monthly donors, many of whom give because they want to help us keep Truthout barrier-free for everyone.
You can help by giving today. Whether you can make a small monthly donation or a larger gift, Truthout only works with your support.