This week, the Federal Reserve is widely expected to raise interest rates above zero for the first time since the Great Recession.
There are all sorts of reasons why this will be a bad decision. Wage growth is still stagnant. We're still a very long way from repairing the hole in American employment left by the Great Recession. And there's still an even bigger hole left by the slow rot of the last few decades.
A burgeoning movement of activists, workers, and economists has been arguing for some time that the Fed should hold off hiking interest rates. They think they've made real headway with Fed Chair Janet Yellen. And they might be right.
Consider a terrific story Ylan Q. Mui published in The Washington Post in early December, based on a raft of sources close to Yellen. It chronicles a long, quiet campaign the chairwoman has waged among her fellow Fed officials to hold off the interest rate hike.
A slim majority of the 17 people who make up the central bank's top brass was willing to start pulling back the Fed's support for the recovery in September.
In a close call, Yellen's job was to tip the scales.
She cleared her calendar for two days in the week before the Fed's vote. In back-to-back calls and one-on-one meetings in Washington, she argued her case and listened to her colleagues' concerns. The central bank ultimately voted to wait, and a majority of officials publicly supported her position. [The Washington Post]
That the Fed managed to hold off hiking rates this long seems to be a testament to Yellen herself. She apparently takes a very deliberate approach to building a unified public front, whatever internal tensions may exist between the voting officials. "Before every meeting of the Fed's top ranks, [Yellen] surveys each official individually through phone calls and meetings, sometimes more than once," Mui wrote. "Privately, one colleague joked that he angles for a later appointment to allow more time to prepare."
While an impressive portrait of Yellen's intellectual heft and seriousness of character, this is also an unpleasant reminder of just how precariously balanced U.S. monetary policy actually is.
In the early months after the Great Recession, the big bright spot in American policymaking was the 2009 stimulus, and the overall willingness of the government to deficit spend. But it was never anywhere near large enough, and it was undone by the Republican-driven consensus for austerity in 2010. At which point, the lone bright spot became the Fed's willingness to keep interest rates at zero, and to try three rounds of quantitative easing to see if it could loosen monetary policy even further beyond the limits of the zero lower bound.
That willingness on the Fed's part was as surprising as it was welcome. As an institution, the Fed faces a host of social and political pressures to prioritize tight money: fighting inflation over fighting unemployment. Yellen herself was considerably more hawkish in her early career as a Fed governor, and tried to talk then-Fed Chair Alan Greenspan out of keeping interest rates low in the late 1990s. Greenspan prevailed, and that decision helped deliver the economic boom of the period — the only time America has seen full employment in decades.
Ben Bernanke, the Fed chair who engineered much of the monetary response to the Great Recession, was appointed by President George W. Bush — itself surprising, given conservatives' usual obsession with tight money. But Bernanke was appointed when the economy seemed to be doing well, so reactionary paranoia about the Fed was at a minimum. After the Great Recession, of course, that paranoia came back in a big way, which is largely why Bernanke no longer associates himself with the GOP. On top of that, during Bernanke's tenure, even Fed officials appointed by Obama tried to talk the Fed chair into tighter money, and to wind down quantitative easing earlier.
The Fed's dedication to loose money has always been fragile, and may now be about to shatter. This is a problem, especially since we're probably due for another recession, and U.S. fiscal policy remains hamstrung by a center-right austerity fixation.
So what to do? The first thing is for voters, activists, and politicians to treat monetary policy with the seriousness it deserves. One of the greatest failures of Obama's presidency was failing to staff the Fed, allowing positions on its decision-making board to run vacant for long periods. Had Obama made this a political priority, he could have given doves like Bernanke and Yellen far more clout in the Fed's internal politics. We need more Fed officials who prioritize fighting unemployment over fighting inflation, and liberals and progressives should insist on appointing them with the same ferocity they insist on appointing pro-choicers to the Supreme Court.
Perhaps we should also reform how the Fed does business. Of the 17 members at the top of the Fed, 12 vote on monetary policy. But only seven of them are appointed by the president and the legislature. The rest are drawn from the banks. This should change: All 12 voting members should be answerable to the democratic process.
The most ambitious option of all would be to change the Fed's mandate. Ironically, most of the enthusiasm for giving the Fed a more strict rules-based mandate comes from the right, where the goal is to force the Fed to keep monetary policy tighter. And it's a move opposed by both Obama's White House and Yellen herself. But there are forms of a strict rule-based mandate that would just as easily force the Fed to run looser policy than it's otherwise inclined. The left should be seriously thinking about jujitsuing this push by the right towards its own ends.
But the first realization that has to happen is that we've gotten very lucky with the post-Great Recession Fed. And there's no reason to think our luck will continue on its own.