J.W. Mason writes: \u00a0To the surprise of no one, the Federal Reserve\u00a0recently raised\u00a0the federal funds rate \u2014 the interest rate under its direct control \u2014 from 0\u20130.25 percent to 0.25\u20130.5 percent, ending seven years of a federal funds rate of zero.<\/p>\n
But while widely anticipated, the decision still clashes with the Fed\u2019s supposed mandate to maintain full employment and price stability. Inflation remains\u00a0well shy of the Fed\u2019s 2 percent benchmark (its interpretation of its legal mandate to promote \u201cprice stability\u201d) \u2014 1.4 percent in 2015, according to the Fed\u2019s preferred personal consumption expenditure measure, and a mere 0.4 percent using the consumer price index \u2014 and shows no sign of rising.<\/p>\n
US GDP remains roughly 10 percent below the pre-2008 trend, so it\u2019s hard to argue that the economy is approaching any kind of supply constraints. And setting aside the\u00a0incoherent notion\u00a0of \u201cprice stability\u201d (let alone of a single metric to measure it), according to the Fed\u2019s professed rulebook, the case for a rate increase is no stronger today than a year or two ago.<\/p>\n
While the consensus view considers the main job of central banks to be maintaining\u00a0price stability by adjusting the short-term interest rate, this\u00a0has never been the whole story.<\/p>\n
The conscious planning that confines market outcomes within tolerable bounds is hidden from view because if the role of planning was acknowledged, it would undermine the idea of markets as natural and spontaneous and demonstrate the possibility of conscious planning toward other ends.<\/p>\n
The Fed is a\u00a0central planner. One particular problem for central bank planners is managing the pace of growth for the system as a whole. Fast growth doesn\u2019t just lead to rising prices \u2014 left to their own devices, individual capitalists are liable to bid up the price of labor and\u00a0drain\u00a0the reserve army of the unemployed during boom times. Making concessions to workers when demand is strong is rational for individual business owners, but undermines their position as a class.<\/p>\n
Modern central bankers pay close attention to the somewhat misleadingly labeled labor market, and use low unemployment as a signal to raise interest rates.<\/p>\n
So in this respect it isn\u2019t surprising to see the Fed raising rates, given that unemployment rates have now fallen below 5 percent for the first time since the financial crisis.<\/p>\n
Indeed, inflation targeting has always been coupled with a strong commitment\u00a0to\u00a0restraining the claims of workers. Paul Volcker is now\u00a0widely admired\u00a0as the hero who slew the inflation dragon, but as Fed chair in the 1980s, he considered rolling back the power of organized labor \u2014 in terms of both working conditions and wages \u2014 to be his number one problem.<\/p>\n
Volcker\u2019s successors at the Fed\u00a0approached the inflation problem similarly. Alan Greenspan saw the fight against rising prices\u00a0as, at\u00a0its essence, a project of\u00a0promoting weakness and insecurity among workers.<\/p>\n
Testifying before Congress in 1997, Greenspan attributed the \u201cextraordinary\u2019\u201d and \u201cexceptional\u201d performance of the nineties economy to \u201ca heightened sense of job insecurity\u201d among workers \u201cand, as a consequence, subdued wages.\u201d<\/p>\n
As Greenspan\u2019s colleague at the Fed in the 1990s, Janet Yellen\u00a0took the same view.<\/p>\n
And when a few high-profile union victories, like the Teamsters\u2019 successful 1997 strike at UPS, seemed to\u00a0indicate\u00a0organized labor might be reviving, Greenspan made no effort to hide his displeasure.<\/p>\n
While it might look like naked class warfare to deliberately raise unemployment to keep wage demands \u201csubdued\u201d (in the soothing language of the Fed\u2019s public statements), the Fed assures us that it\u2019s really in the best interests of everyone, including workers.<\/p>\n
J.W. Mason writes: \u00a0To the surprise of no one, the Federal Reserve\u00a0recently raised\u00a0the federal funds rate \u2014 the interest rate under its direct control \u2014 from 0\u20130.25 percent to 0.25\u20130.5 percent, ending seven years of a federal funds rate of … Continue reading ![\"Yellen,](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2016\/01\/Yellen-Volker-Grenspan-Bernanke.jpg\")
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