These people have called on the Fed to do whatever the central bank can to keep boosting the economy until it gets there.
The central bank is widely expected to lower interest rates Wednesday — for the third time this year — to try to prevent the slowing U.S. economy from stalling. Wall Street is pricing in a 97 percent likelihood that the Fed will cut the rate from under 2 percent now to below 1.75 percent. President Trump wants an even bigger cut, and he has labeled Fed leaders “boneheads” for not slashing rates faster.
A key question for Fed Chair Jerome H. Powell is what to do after this week. Wall Street investors do not expect another reduction this year, and views are split on what the central bank will do in 2020. Powell has tried to keep the Fed out of the political fray, and he and his colleagues are aware that stimulating the economy next year — or not — could influence the election.
There has been a lot of debate about Trump’s influence, if any, on the Fed, but perhaps the most powerful argument central bank leaders have been hearing to lower rates has come from people on the front lines of America’s poor and working-class neighborhoods. They have stood up at the Fed Listens events and urged central bankers to do more to boost the economy.
“When I hear we’re at full employment, that is not my reality. That is not our community’s reality,” said Juan Salgado, chancellor of City Colleges of Chicago, with 80,000 mostly minority students, at a Fed Listens event in Chicago in early June.
Full unemployment isn’t an exact science, leaving room for debate about when the economy ever reaches this level. The jobless rate is 3.5 percent, a half-century low, but unemployment has shown signs of picking up in some areas where the economy is softening.
Salgado’s words were echoed over and over again. At a Fed Listens event hosted by the Cleveland Fed later in June, Carolyn Valli, executive director of the Central Berkshire Habitat for Humanity, was asked whether she thought the nation was at full employment.
“No, no, no, no and no. That is not the experience of low-income folks in our community,” replied Valli as many around her nodded in agreement. “It doesn’t feel like a boom yet.”
Denise Scott, executive vice president for programs at the Local Initiatives Support Corporation, was equally as blunt at the D.C. Fed event in October: “It doesn’t feel like full employment.”
A number of Fed leaders looked surprised at what they were hearing at a time when the official unemployment rate has been under 4 percent for more than a year, and there’s evidence that the remarks have influenced Powell, among other top leaders at the central bank.
“Our challenge now is to do what monetary policy can do to sustain the expansion so that the benefits of the strong jobs market extend to more of those still left behind,” Powell said in August. He has made similar remarks at almost every public appearance since his June news conference.
In many ways, what the Fed has been hearing from people around the country has strengthened the case for the U-turn in policy the central bank made this year. Coming into 2019, the Fed planned to raise interest rates to ensure the economy didn’t overheat, but Powell quickly changed course. The central bank paused interest rate hikes in January, then started cutting rates this summer out of concern that the trade war and the weakness overseas would drag the U.S. economy down, too.
Congress gave the Fed two jobs: low unemployment and stable prices. For decades, the Fed has tried to balance the two goals, but since the Great Recession, inflation has not returned. Many models predicted inflation would come back, especially as the economy entered a record-breaking 11th year of growth, but it hasn’t happened, and a big rethink is underway among economists about whether to bias a bit more toward boosting jobs and pay, at least until inflation rises for a sustained period.
“It really is very important that the labor market remain as tight as possible for as long as possible,” said Rachel Flum, executive director of the Economic Progress Institute at the Boston Fed Listens event in May. “We really think the benefits of a prolonged, progression, sustained period of tight labor markets outweighs the inflationary costs, especially right now where we haven’t seen those going up”
Myron Frans, commissioner of the Minnesota Management and Budget office, put it this way at a Fed Listens event in Minneapolis in April: “I would sacrifice a little bit of price stability for more employment — maximum employment — personally.”
The Fed has a stated goal to get inflation to 2 percent. It has been running consistently below that level for years, and some Fed leaders want to lower interest rates in an effort to boost inflation. Lowering rates would probably also have the effect of boosting the labor market, because a hotter economy should trigger companies to hire more people to meet demand from customers.
There is evidence that people who have traditionally struggled to find work are having an easier time now. There has been a surge of Hispanic women joining the labor force and unemployment rates for Hispanics, African Americans and those without college degrees are at or near historic lows. Pay has also been rising quickly for some of the lowest-paid workers, partly because of a tight labor market and partly because many states and cities have increased their minimum wages.
But many people stressed to the Fed that these Americans who have just gained jobs, including many with criminal records, are often in the most danger of losing employment if the economy falls into a downturn.
“That doesn’t mean that once they’ve been hired they will necessarily stay in that job,” said Andy Van Kleunen, chief executive of the National Skills Coalition, at a Chicago event in June. He also cited issues like transportation and child care that can cause people to have to leave a job if they can’t get those problems addressed.
Powell acknowledged that there is only so much the Fed can do with the tools that it has to address economic problems.
“It also feels like there’s a need for policies beyond just keeping interest rates low,” Powell said this month in Kansas City. “It’s really also about training. It’s about education. It’s about other things that enable people to make a connection with the labor force and stay there. That’s kind of what I’m hearing and taking away from what you’re saying.”
The main lever the Fed has is to move the benchmark interest rate. It is currently sitting at a level that most economists think is about neutral, meaning it neither stimulates nor contracts the economy. Going lower would probably pump up the economy.
One of the last words Fed leaders heard before they went into a quiet period to prepare for their interest rate decision this week was from Herb Hardwick, founder of Hardwick Law Firm in Kansas City, that does legal work for many housing and commercial real estate projects. He warned that he has starting to prepare for a slowdown.
“To guard against the downturn we think will occur in the next 18 months to two years, we’re starting to diversify our business,” he said. “We are starting to see a softening with respect to the development side. Even though money is available for some segments of the community, I think there has been a slowdown.”