Summary: Usually we can only guess at the motives of our senior officials. But on rare occasions they give us clues to their real priorities and objectives. The Fed is especially opaque, so we speculate about their odd rate increases during a slow and slowing economy. Yesterday Janet Yellen explained why. The answer is shocking (to those who do not know the Fed’s history).
From TIME’s transcript of Janet Yellen’s press conference, where she explains why the Fed raised rates in a slow economy. Bloomberg reporter Kathleen Hays asks why. The answer should be read by every citizen. Yellen confirms the suspicion long held by many of us: the Fed serves our corporate rulers. Among other things, they fight “wage inflation” — aka workers sharing benefits of America’s rising productivity.
This transcript has been lightly edited for clarity.
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Hays: I’m going to take the opposite side of this, because — and this question about market expectations, and how the markets got things wrong, and then how you say the Fed suddenly clarified what it already said. But if you look at the Atlanta Fed’s latest GDP tracker for the first quarter, it’s down to 0.9 percent. We had a retail sales report that was mixed. …the consumer does not appear to be roaring in the first quarter …
If you look at measured of labor compensation, you note in the statement that they’re not moving up. …And you yourself said …that is perhaps an indication there’s still slack in the labor market.
…What happened between December and March? GDP is tracking very low. Measures of labor compensation are not threatening to boost inflation any time fast. The consumer is not picking up very much. Fiscal policy, we don’t know what’s going to happen with Donald Trump. And yet, you have to raise rates now. So what is the motivation here? The economy is so far from your forecast in terms of GDP, why does the Fed have to move now? What does this signal, then, about the rest of the year?
Yellen: GDP is a pretty noisy indicator. If one averages through several quarters, I would describe our economy as one that has been growing around 2% per year. As you can see from our projections, that’s something we expect to continue over the next couple of years. Now, that pace of growth has been consistent with a pace of job creation that is more rapid than what is sustainable if labor force participation begins to move down, in line with what we see as its longer-run trend with an aging population.
Now, unemployment hasn’t moved that much, in part because people have been drawn into the labor force. Labor force participation, as I mentioned in my remarks, has been about flat over the last 3 years. So in that sense, the economy has shown over the last several years that it may have had more room to run than some people might have estimated, and that’s been good. It’s meant we’ve had a great deal of job creation over these years.
There could be room left for that to play out further. Policy remains accommodative. We expect further improvement in the labor market. We expect the unemployment rate to move down further and to stay down for the next several years. So we expect that the path of policy we think is appropriate is one that is going to lead to some further strengthening in the labor market.
YoY % change of Average Hourly Earnings of Workers
minus percent change YoY % change CPI.
Hays: Following on that, you expect it to move. But what if it doesn’t? What if GDP doesn’t pick up? What if you don’t see wage measures rising? What if GDP gets stuck at 1.7%? Is it your view that if there’s a risk right now in the median forecast, that it’s fewer hikes this year rather than the consensus or more?
Real GDP month over month. The purple line is 2%,
the average annual GDP since 2010. Do you see any acceleration?
Yellen: …As you said, the data have not notably strengthened. There’s noise always in the data from quarter to quarter. But we haven’t changed our view of the outlook. We think we’re on the same path. We haven’t boosted the outlook, projected faster growth. We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market.
I would describe some measures of wage growth as having moved up some. Some measures haven’t moved up, but there’s some evidence that wage growth is gradually moving up which is also suggestive of a strengthening labor market. And we expect policy to remain accommodative now for some time. So we’re talking about a gradual path of removing policy accommodation as the economy makes progress moving toward neutral. But we’re continuing to provide accommodation to the economy that’s allowing it to grow at an above-trend pace that’s consistent with further improvement in the labor market. …
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The purple line is 1.6% YoY jobs growth, what the Fed considers “unsustainable.”
Jobs have been growing at this rate since November 2011.
What about inflation?
The Fed is charged with three goals: “maximum sustainable employment, stable prices, and moderate long-term interest rates.” They have kept interest rates low. Slowing growth of real wages shows that employment has not hit maximum sustainable employment. The below graph shows the best predictor of inflation: CPI excluding food and energy prices (they’re random and volatile). Do you see any sign of rising inflation?
What will the Fed do next?
Hays asked “What happened between December and March {to make them more willing to raise rates}? The obvious answer is Trump’s election (details here). But future decisions will be difficult. We don’t know what the Fed plans to do, or even if they have a plan.
But Yellen’s answer to Hays’ question reveals that the Fed intends to suppress wages. Yellen sees rising wages (often called “wage inflation”) as inherently bad. She does not even attempt to compare the increase in wages to inflation, rising productivity, or profits — using economic theory to show the level and increase in wages was too high.
Conclusions.
Fed officials lie to us. They call it managing expectations, and consider it one of their most powerful tools. But sometimes they speak the truth. Here Fed chairman Yellen explains why the Fed raises rates with few signs of rising inflation amidst a slow and slowing economy.
She says that the Fed has decided that the economy cannot grow faster than 2% — its speed in Q4, twice that expected in Q1 — so raising rates to further slow growth is OK. That does not make much sense. But Yellen also reveals, in a murky fashion, the Fed’s real concern: rising wages. Her answer to Hays question (“Why?”) was all about workers jobs and wages — no mention of inflation or the economy over-heating.
“…that pace of {GDP} growth has been consistent with a pace of job creation that is more rapid than what is sustainable if labor force participation begins to move down {in fact, it’s rising}, …there’s some evidence that wage growth is gradually moving up {not in real terms} which is also suggestive of a strengthening labor market. …We think we’re moving along the same course we’ve been on, but it is one that involves gradual tightening in the labor market. I would describe some measures of wage growth as having moved up some. Some measures haven’t moved up, but there’s some evidence that wage growth is gradually moving up which is also suggestive of a strengthening labor market.”
Her intent is clear. She cannot state that they want to depress wages, so corporations gain the full benefit of rising productivity. Profits, profits, profits — that’s the name of the plutocrats’ game. The Fed is just one cog in the profits machine.
Republicans criticize the Fed for its insufficient enthusiasm for rising inequality. Now that they control Congress and the White House, expect the Fed to respond (as they should). The net tightens around us, with four more years to go.
For More Information.
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about the Federal Reserve, about monetary policy, about inequality and social mobility, and especially these…
- What every American needs to know about the Federal Reserve System.
- What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!
- The Fed sees years of slowing growth. Prepare for years of political turmoil.
- Today’s mythbusting: the Fed is not suppressing interest rates.
- Today’s Job Report Shows The Madness Of Our Situation – Ignore At Your Peril.
To better understand what lies ahead for America…
I recommend reading The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War
“In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, motor vehicles, air travel, and television transformed households and workplaces. But has that era of unprecedented growth come to an end?
“Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth challenges the view that economic growth will continue unabated, and demonstrates that the life-altering scale of innovations between 1870 and 1970 cannot be repeated. Gordon contends that the nation’s productivity growth will be further held back by the headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government, and that we must find new solutions.
“A critical voice in the most pressing debates of our time, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.”
