Why the Fed Raised Rates - The New York Times
The Federal Reserve is ready to party like it’s 1988.
The rest of us are eying a labor-force participation rate that is lower than it has ever been through the 80s and the 90s (a period that included 3 recessions). The share of part-time employment is still higher than before the Great Recession. Even full-time employment now rarely includes such economic stabilizers as defined-benefit pensions or comprehensive healthcare coverage. This might be why all those jobs Yellen is celebrating don’t seem to be doing a thing to inflation, which has remained well below the Fed’s own target of 2% for most of the last 10 years. But wow, 4.3% unemployment! It’s enough to make us all feel young again!
Yellen is steering the economy with all the skill of a student driver staring intently and exclusively at the speedometer.
It gets worse. Let’s remember that the Fed has maintained explicit low interest rate guidance and has expanded its balance sheet through quantitative easing in order to stoke an economy recovering from a recession with all the vim of a middle-aged man the morning after an all-night bender. The Fed’s ability to act further to foment growth is extremely limited. This isn’t just overconfidence. It’s lunacy. Yellen is stepping into the ring with a gorilla after spending 10 years tying both hands behind her back with increasingly elaborate knots.
It most certainly doesn’t have to be this way. The yield curve on US government debt is sloped upward, indicating higher rates are already priced into bond markets and by extension long term borrowing facilities and equities. Yields on all assets, not just government debt, have declined, suggesting a persistent and global downward revision of the value of capital itself in a modern economy driven by information and automation. This is the true shape of Yellen’s bugaboo. It’s not that prices are going to rise because everyone has more money to spend, it’s that yields will continue to fall because no one wants the capital that savers want to grow. That is a game well outside the purview of monetary policy and Yellen and the FOMC, exhausted of monetary remedies, need to take their ball and go home before they do any more damage.
The real game is in the amusingly-named “real economy” (what must be the other kind?). A vast and growing range of perils once absorbed by unions, pensions and governments are now handled “at retail,” by individuals and families. The deadweight losses associated with this shift show up in healthcare, housing and education, and these are the drivers of the tiny blip of inflation that have spooked the tender souls at the Fed. Yet the cost of these services is driven by artificially (and intentionally) limited supply, and saving for these services consumes the lion’s share of household budgets for those households that have any savings at all. The rest turn to debt. Rising rates don’t bring down the prices of these essential services, they raise them in the sloppiest of ways, leading to defaults and personal bankruptcies. The spending thus displaced has a deflationary effect on the rest of the economy.
The factories and railroads of the 19th century and the post-war reconstruction projects of the 20th have burned into the minds of a generation of economists that capital is king. We needed so dang much of it and had so very little of it as we set about connecting the New World and then bombing and rebuilding the Old. Yet the cannon of industrial capitalism is positively archaic to a generation that just wants to send their friends Instagram pictures from as many countries as they can afford to visit. Providing them an education, a small safe and urban place to live, and the help they need if they fall ill constitute the Marshall Plan of Yellen’s generation, would they wake up to notice it.