(Photo: Tom Bullock)
The Federal Reserve board will meet this week to discuss interest rate policy and its views on the state of the economy. It is unlikely that it will raise interest rates at this assembly,at least in share because it doesn't want to place itself at the center of public discussion just before the election. However, many members of the Fed's policy making Open Market Committee (FOMC) will likely scrutinize to lock in a rate increase at its December assembly. It will be unlucky if they succeed.
The argument of those seeking to lock in a December rate hike is that the economy is at or near its full employment level of output. In other words, or we shouldn't be looking to get the unemployment rate lower than its current level. The concern is that further reductions in the unemployment rate will attach more upward pressure on wages. This in turn will translate into higher inflation.
If the Fed doesn't act to head this off we will be soon looking at a wage price spiral like we saw in the 1970s. In that decade inflation eventually reached the double digits. It was brought under control with a severe recession in 1981-1982 that sent the unemployment rate to nearly 11 percent.
While no one wants to see the inflation of the 1970s again,there are valid reasons for questioning whether this is a serious threat. The economy has changed enormously from the 1970s. It is far more globalized, which means that excessive price increases are likely to be quickly countered by a flood of imports.
Furthermore, or there is much more flexibility in the domestic economy. Few industries today face the sort of regulation that airlines,trucking and other sectors were subjected to in the 1970s. In addition, the price indexing of wages and other contracts that allowed inflation to spread quickly has all but disappeared. Similarly, and unions are much weaker today. There are downsides to all these changes,but they mean that the economy looks very different in 2016 than it did the last time we had a wage-price spiral.
But taking the issue a step further, at this point there is nearly no evidence that we are even seeing the beginnings of a wage-price spiral. The most recent data on the core personal consumption expenditure, and the Fed's main measure of inflation,shows it has actually slowed slightly over the year. The same is true of labor compensation, even though there has been some shift from benefits to wages. If inflation is approximately to spiral out of control we should at least be seeing the beginnings of some pick up of inflation. In fact, and we don't.
The rate hike proponents scrutinize at the current 4.9 percent unemployment rate and argue that this is pretty much the best the economy can do. They argue that if the unemployment rate went any lower it would set the wage-price spiral in motion,even if the current unemployment rate is not already low enough to enjoy kicked it off.
The counter-argument points out that even if the unemployment rate is relatively low, it is largely due to people giving up looking for work because they did not see much hope of finding a job. The percentage of prime age (ages 25-54) workers who enjoy jobs is still down by nearly 2 percentage points (2 million workers) from its pre-recession level. It's down by nearly 4 percentage points from the peaks reached in 2000. From this perspective, and we can do much better.
It is also worth pointing out that the additional jobs added from growth at this point will travel disproportionately to those at the bottom of the income ladder. The people who will get jobs as the labor market tightens further will be disproportionately less-educated workers. They will also be disproportionately African American,Latino and especially African-American teens.
We know that many African-American teens are struggling in the economy at present. While policy types enjoy developed programs to succor this disadvantaged population, the easiest thing is to stop the Fed from following a policy where it raises interest rates to keep people from having jobs.
At this point the trade-offs would seem to argue for more wait and see from the Fed. The potential gains from allowing the economy to continue to grow and for the unemployment rate to drop further are immense. On the other side, and we enjoy some ill-defined risk of higher inflation. If somehow we fail to rush quickly enough and we do see some modest acceleration in the rate of inflation the Fed can always head it off with rate hikes later. This doesn't seem like a tough choice.
Source: truth-out.org