The Fed’s decision to continue hiking interest rates from the ultralow levels they were at during and after the financial crisis might seem like a no-brainer. Interest rates are low by historical standards. And except for a few recent hiccups, the U.S. economy appears to be humming along, with stronger global growth laying a smooth path for its future.
Yet the Fed’s decision to raise its benchmark interest rate by a quarter point on Wednesday was, for the first time in a long time, met with some dissent. After years of being criticized by those on the right for keeping interest rates too low, Fed chair Janet L. Yellen is finally seeing criticism, much of it from the more dovish left, for pushing rates too high.
The Fed is charged with balancing two basic responsibilities. On one hand, it needs to ensure interest rates are low enough that the labor market is strong and almost all Americans who want a job can find one. On the other, it needs to make sure that rates are high enough to restrain rapid increases in prices, which can have a devastating effect on savers, creditors and the economy.
The current economy, however, presents something of a puzzle. The jobs market looks solid. The unemployment rate fell to a 16-year low in May — a suggestion that the Fed has fulfilled the first part of its goal, jobs, and should shift its focus to the second, restraining inflation. Yet measures of price growth remain stubbornly below the level that the Fed targets.
Some economists argue that inflation is just lagging, and will rear its head soon. They believe that the Fed should act now — because if it doesn't, it might have to raise interest rates more quickly later to offset inflation, and that could be far more damaging to the economy. They also point out that hiking rates now gives the Fed more space to cut rates later to stimulate the economy in case of a downturn.
Yet others believe the time just hasn’t come to raise interest rates.
On Friday, Neel Kashkari, the president of the Minneapolis Fed and a former Republican candidate for governor of California, took the somewhat nontraditional step of publishing remarks online about why he had voted against the rest of his colleagues and the interest rate hike, for the second time in just three months. In a post on Medium, he argued that inflation remains much lower than the Fed’s target, and that it doesn’t show signs of picking up much soon.
That also was the position of a left-leaning group called Fed Up, which on Monday assembled protesters in three cities to urge the Fed to delay its rate hike and more fundamentally rethink the way it sets its policy. The group argued that by raising interest rates and thus the cost of borrowing, the Fed’s rate hike would end up hurting disadvantaged workers, especially African Americans, Hispanics and rural residents.
Josh Bivens, director of research at the left-leaning Economic Policy Institute, called Wednesday’s rate hike “a clear mistake.”
“Today’s decision seems to indicate that the Fed is on autopilot to raise rates, regardless of what the data argue,” he wrote in a note. “This will lead quite soon to a pronounced slowdown in economic activity and job growth, and could essentially mean that we never manage to achieve genuine full employment or give American workers a real chance at sustained, durable wage growth.”
It's unusual criticism for Janet L. Yellen, a labor economist by training who has sometimes been criticized — including by Congressional Republicans and President Trump, at least before he came into office — for keeping interest rates too low.
When asked what she thought about the president’s characterization of herself as a “low-rate person” in Wednesday’s news conference, Yellen replied, “Well, I have felt that it's been appropriate for interest rates to remain low for a very long time. … I thought it was necessary to support the economy at that time and was strongly in favor of those policies.”
Fed Up argues that by keeping interest rates low and letting the economy run hotter, the Fed could help disadvantaged groups with traditionally high levels of unemployment find jobs and get wage increases. As the economy continues to expand and more workers get good jobs, employers have to broaden the pool of labor they are considering and offer wage increases to attract workers. Low interest rates also help debtors — traditionally low-income groups — at the expense of Wall Street creditors.
Yellen's past comments show she understands the value for disadvantaged groups of getting to a robust economy. Yet she and other economists have also argued that Fed interest rate policy is too blunt of a tool to target specific groups, and that the task is better left to government policy.
Tara Sinclair, an economist at George Washington University and senior fellow at the jobs site Indeed.com, adds that it’s not clear that the winners of a hot economy would ultimately be workers. While a strong economy generally gives workers more bargaining power over their employers, there might be something else going on — such as the decline of unions, or globalization and the growing power of multinational companies – that is reducing the bargaining power of American workers.
If the Fed runs the economy hot, we might see a situation in which workers see an increase in the price of goods they buy, but not their wages, said Sinclair. “They might be losers in this, rather than winners.”
With the exception of Kashkari, the Fed didn’t express much hesitation about this week’s rate hike. Members of the Fed's open market committee, which set interest rates, continued to forecast another rate hike this year and three more rate hikes each in 2018 and 2019. Markets will be watching closely to see whether further low inflation and wage growth readings could alter this schedule.
In the news conference Wednesday, however, Yellen defended the Fed’s policy of gradual rate hikes as forestalling a situation that could be much more damaging for disadvantaged groups.
“We want to keep the expansion on a sustainable path and avoid the risk that … we find ourselves in a situation where we've done nothing, and then need to raise the funds rate so rapidly that we risk a recession,” she said. “But we are attentive to the fact that inflation is running below our 2 percent objective.”