It looks like the Federal Reserve is going to do something remarkable this week: It's going to cut interest rates while unemployment is lower than it's been in decades.
Even more remarkably, Fed Chair Jerome Powell has been pretty explicit that they'll do this to help "communities at the edge of the workforce," as Powell put it at a recent congressional hearing. "It's just so important for us to continue that process for a couple of years." It's shocking rationale considering that Powell — along with most voting Fed officials at this point — was put in place by President Trump, a man not exactly known for his concern for the less privileged.
By some amazing twist, did none other than Donald Trump somehow give us our most progressive Fed chair? Or even our most progressive Fed?
Most likely, the cut itself will be tiny — a mere 0.25 percentage point reduction in the Fed's interest rate target. It's the context of the cut that looks a lot more earthshaking. The vast majority of times when the Fed has ended one of its regular meetings with an interest rate cut, the economy was already in recession. The central bank has reduced interest rates outside of recessions only seven times in the last three decades. And in those instances, the economy was facing some obvious headwind: the stock market was struggling, or a financial crisis was unfolding, or at the very least unemployment was significantly higher than its current multi-decade low.
Under Ben Bernanke, the Fed cut rates to zero in 2008 and 2009, and held them there for years, which certainly freaked out large portions of the political and economics world. But the Fed was also facing the worst economic collapse since the Great Depression, so this sort of move was hardly beyond the pale given the circumstances. Janet Yellen, who followed Bernanke and preceded Powell, came into the Fed with a reputation as a dove, but nonetheless started hiking rates to bring monetary policy back towards something like "normalcy" as defined by the mainstream. Indeed, the last time the economy faced similar circumstances, with low unemployment and still-modest inflation, was in the late 1990s. Yellen was a Fed official then, too, and actively pushed back against then-Chair Alan Greenspan for continuing to put off an interest rate hike.
Now, for Powell to cut interest rates while unemployment is 3.7 percent, and economic growth is modest but steady, with no obvious major problems unfolding? There is really no way to fit that into the mainstream toolkit. This is a change.
That said, you could see this change, not so much as break between Powell and his predecessors, but as a continuation of an evolution at the central bank that stretches across all three. That seems particularly clear when it comes to the Fed's growing concern for African-American workers and other less-privileged Americans who are routinely shunted to the side in the jobs market.
"There really isn't anything directly the Federal Reserve can do to affect the structure of unemployment across groups," Yellen told Congress early in her tenure, on the subject of what the Fed could do to address African-American unemployment. That was bog-standard monetary policy thinking at the time, but Yellen nonetheless came in for some heat over it. Activist groups like Fed Up were beginning to take the case directly to Fed officials that the persistently higher unemployment rates for black Americans and other marginalized groups demanded the central bank run the economy hotter and longer than it might if it was just going off of aggregate employment data. A year later, Yellen was explicitly taking stock of those groups' situation to explain the Fed's policy thinking.
"I can't remember a Fed chair who was as emphatic about the benefits of this high-pressure labor market to people who have long been left behind," economist Jared Bernstein recently said of Powell. Which is true, but also arguably an example of Powell taking up a legacy began by his predecessors, and carrying it to its logical conclusion, rather than carving a completely new path.
You can also see this in the broader monetary policy discussion. The post-Great Recession world has not been kind to the Fed's assumptions: Despite unemployment falling to astonishing lows, inflation has simply failed to ramp up in the way mainstream theory says it should. Over time, the entire institution has been forced to ask itself what it believes: the accepted theories or its own lying eyes? Powell actually came into the Fed chair spot with a reputation as more of a hawk than Yellen, was initially appointed to the central bank by President Obama (before Trump elevated him to Fed chair), and in fact never dissented from a Fed decision under either Bernanke or Yellen.
These days, Powell is telling Congress that 3.7 percent unemployment may be "well within the range of potential estimates" of what's sustainable over the long term; a near-unthinkable thing for a Fed chair to say a few years ago. But just to hammer the point of continuity home, Yellen herself just endorsed the idea of 0.25 percentage point interest rate cut. Thus, again, this looks like Powell speaking for a dramatic shift in thinking of the central bank as a whole.
Of course, that still leaves the question of how Trump, of all people, got us to this point?
Unfortunately, some of the answer is that the Fed's responsibilities extend to regulation as well as macroeconomic management. And on that former subject, the Fed has become somewhat more right-wing under Powell and Trump's other appointees. Trump is also something of an oddball in the Republican ideological ecosystem, at once agreeing with the GOP in its preference for deregulation and breaking with it in championing looser monetary policy.
Finally, Trump seems to have simply been asleep at the switch for the first few years of his administration when it came to Fed appointments. He rubber-stamped whatever down-the-line mainstream people his cabinet suggested. And since the entire Fed was arguably shifting in a more progressive direction, that rubber-stamping continued the process.
The fact is, no matter how we got here, if the Fed does go ahead with a rate cut this week, we will arguably be seeing the most progressive incarnation of the central bank — at least where monetary policy is concerned — that we've had in decades.