Fed cred
May 12, 2016

Hillary Clinton embraced an ambitious proposal for reforming the Federal Reserve on Wednesday, according to a statement her campaign gave to The Washington Post.

Five of the 12 Fed officials who decide the course of monetary policy at the national level are selected by six of the nine governors that run each regional bank in the Federal Reserve system. Three of those six governors are effectively picked by the banking industry in each region. The three who don't pick the officials for the national Fed board are drawn directly from the banking industry, but they still wield considerable influence.

Leftwing reform campaigns have argued for removing the financial industry's influence in the Fed system, and that's what Clinton endorsed. "Secretary Clinton believes that the Fed needs to be more representative of America as a whole and that commonsense reforms — like getting bankers off the boards of regional Federal Reserve banks — are long overdue," said campaign spokesman Jesse Ferguson.

This effectively puts Clinton in the same ballpark as Bernie Sanders on the issue. It also arrives the same day 111 representatives in the House and 11 senators — including Elizabeth Warren — released a letter calling for more diversity among Fed officials. Those officials are overwhelmingly white men, and the letter noted that racial minorities are disproportionately affected when the Fed prioritizes low inflation over high employment. Jeff Spross

October 8, 2015

The Federal Reserve released the minutes from its September meeting today. We learned the results of that meeting the day it ended, but the minutes can still provide a window into what's going on in the heads of the Fed officials who vote on monetary policy. Take this quote:

To some [members], the continued subdued trend in wages was evidence of an absence of upward pressure on inflation from current levels of labor utilization. Several others, however, noted that weak productivity growth and low price inflation might be contributing to modest wage increases. A number of participants reported that some of their business contacts were experiencing labor shortages in various occupations and geographic areas resulting in upward pressure on wages, with a few indicating that the pickup in wages had become more widespread.

Consider that line against something you'd never read in the Fed minutes. Something like: "Other members responded that their contacts amongst the unemployed and low-income workers saw no evidence of rising wage pressure at all."

Fed officials understandably rely on their contacts throughout the world of business owners to gauge regional changes in the economy. Those contacts have vested interests in having monetary policy prioritize low inflation over low unemployment. That doesn't mean the stress and worries they're under are not genuine. But with the exception of recent activism efforts, people who desperately need job growth to continue have no equivalent access to Fed officials' ears. Cold aggregate data is all that speaks for them.

That's bound to have an impact on how the Fed weighs it priorities. Hearing from people on the ground may be qualitative, not quantitative, but it can help parse the quantitative data. Human beings are social creatures, after all, and Fed officials are only human. Jeff Spross

September 17, 2015

The Federal Reserve wrapped up its latest two-day policy meeting on Thursday with a decision to keep interest rates in the 0 to 0.25 percent range, the rock-bottom level they've been at since the 2008 crash. Two more meetings remain in October and December, and it's widely anticipated the Fed will deliver its first hike before year's end. But the remarkable stretch of zero interest rates, and the increasing debate over the proper level, made this one of the most-watched decisions by the Fed in quite a while.

Even if a hike does come by December, the increase is likely to be minimal and very gradual. "Economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run," the Fed said in its statement.

Amongst the voting committee at the Fed that determines monetary policy, the decision was near unanimous. Only one member dissented, in favor of hiking the range to 0.25 to 0.5 percent. Jeff Spross

August 19, 2015

The minutes from the July meeting of the Federal Open Market Committee (FOMC) were released today. On the face of it, they don't tell us anything the Fed's press release that month didn't reveal: The FOMC feels the crucial trends — rates of job creation, the return of people to labor force, etc — are all improving at a modest-but-encouraging pace. They anticipate inflation will begin rising in the near future, and they'll begin slowly taking interest rates off the zero lower bound.

But one chunk of the minutes does get at a crucial disagreement amongst the FOMC members:

Most members saw room for some additional progress in reducing labor market slack, although several viewed current labor market conditions as at or very close to those consistent with maximum employment. Many members thought that labor market underutilization would be largely eliminated in the near term if economic activity evolved as they expected. However, several were concerned that labor market conditions consistent with maximum employment could take longer to achieve, noting, for example, the lack of convincing signs of accelerating wages. [Minutes of the Federal Open Market Committee July 28–29, 2015]

"Maximum employment" (or "full employment") is where jobs are so plentiful that employers can only gain new workers by outbidding other businesses with higher wage offers. If productivity throughout the economy increases at a slower pace than those bids, inflation will start rising. So the Fed hikes interest rates to keep inflation contained.

The problem is, while the headline unemployment rate of 5.3 percent is close to what's generally viewed as maximum employment, the other signs aren’t there. Wage growth and the inflation rate are still flat, and the portion of the population that's employed is still below its pre-2008 peak.

In fact, that 2008 peak was below its previous peak before the 2001 recession. So there's an argument in some quarters that not only should the Fed wait for full employment, but it shouldn't raise interest rates even after full employment has been achieved — just let the economy run hot for a while to repair the previous damage.

At any rate, this disagreement — between people who think maximum employment is nigh upon us, and those who think it's still a ways off — is splitting the FOMC itself. It's probably the most important yet under appreciated debate currently going on in economic policy. Jeff Spross

August 4, 2015

The Fed, America's central bank, has two jobs. It's supposed to maintain full employment, and keep inflation from getting out of hand. Most people interpret the latter objective as simply stopping inflation from getting too high, but the responsibility actually goes two ways. Inflation also must be kept from getting too low, because it represents a shortfall of aggregate demand, prevents quick price adjustment, and makes a liquidity trap harder to avoid. Price stability, neither too low nor too high, is the mandate. That's defined by the Fed itself as an inflation rate of 2 percent.

Economist Jared Bernstein, in a letter to Fed Chair Janet Yellen, points out that the Fed hasn't hit its inflation target for over three consecutive years — and it's actually getting worse over time:

The Fed is reportedly likely to raise interest rates — so it can get ahead of increasing inflation, supposedly — in September. It is hard to explain why. Ryan Cooper

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