The jobs report on Friday showed the economy created 248,000 jobs in September and the unemployment rate fell below 6.0 percent for the first time since the early days of the recession. This is good news for workers. While we are still far from anything resembling full employment, it is getting easier for people to find jobs.
If the economy keeps creating jobs at this pace, workers will finally have enough bargaining power to see some real wage gains, thereby getting their share of the benefits of economic growth. But this is also the bad news in the story. There are many powerful people who want to keep these wage gains from happening.
Immediately after the jobs report was released, James Bullard, the president of the St. Louis Federal Reserve Bank, was on television insisting that the Fed had to start raising interest rates. Bullard complained that the Fed was behind schedule and needed to slow the economy to prevent inflation.
There should be no ambiguity about what Bullard was saying. He knows that higher interests will keep people from getting jobs. If the Fed raises interest rates it will discourage people from buying homes and cars. Fewer people will refinance mortgages, which has been a way for tens of millions of people to free up money for other spending over the last few years.
Higher interest rates will also have some effect in reducing investment. They will also make it more difficult for state and local governments to finance bond issues for building or repairing infrastructure. And they will increase the value of the dollar, which makes our goods less competitive internationally, thereby increasing the trade deficit.
Bullard wants to see the economy slow because he doesn’t want to see more workers get jobs. This is because when more workers get jobs, it will increase their bargaining power and they will be in a position to demand higher wages. This is exactly the inflation that worries Bullard. If workers are getting higher wages then we will see more inflation than in a situation where wages are stagnant. Bullard wants the Fed to slow the economy so that wages remain stagnant.
If Bullard were just an obscure voice in the wilderness, we could all have a good laugh and get on to real issues. Unfortunately, he is a member of the Fed’s 19 person Open Market Committee that decides interest rate policy. Several of the other district bank presidents who sit on this committee have expressed similar views.
More importantly, there are many prominent economists and business people outside of the Fed who press the same concerns as Bullard. As many reports on the better than expected jobs numbers said, the September jobs report will make the Fed’s job more difficult. There will be more pressure on Fed chair Janet Yellen and other inflation doves to start raising interest rates.
This is where the political realities of the Fed’s policymaking process really matter. The Fed has been structured in a way that gives the financial industry, with its obsessive concern about inflation, excessive control over Fed policy. The twelve district bank presidents who comprise the bulk of the open market committee (only five vote at any one time) are appointed through a process that is dominated by the banks in the district. The seven governors (only five seats are currently filled) who make up the rest of the committee are appointed by the president and subject to congressional approval.
These governors serve 14-year terms; which is supposed to insulate them from political pressure. But the governors also tend to be unduly deferential to the concerns of the financial industry. Traditionally many of the governors have also had backgrounds in finance. For example, Stanley Fischer, who is currently vice-chair, had a stint as a top executive at Citigroup after a long career as an academic economist.
Thus far Yellen has been a strong voice for staying the course, arguing that the risks of an inflationary spiral are still remote. Her position enjoys strong support in the data. Inflation continues to come in below the Fed’s 2.0 percent target. And since this is an average, not a ceiling, the Fed can allow inflation to be above 2.0 percent for some time and still be keeping to its target – which is not itself written in stone.
But in Washington, reality always takes a back seat to politics. And there is a real danger that the political power of the financial sector will force Yellen to start slowing the economy and stopping job growth long before workers gain any bargaining power. This risk will be greater if the public sits back and leaves Fed policy to the “experts.”
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