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What is the Federal Reserve Doing?

POSTED: June 26, 2015, 12:00 pm

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Last week, the U.S. Bureau of Labor Statistics issued its numbers for inflation and for real wage movements. The numbers reflected the weak numbers of the first quarter for economic growth: Zero inflation and zero real wage growth in the past three months. The economy is showing signs that it is fragile. It can be spoofed by international developments that raise the value of the dollar and slow U.S. export growth, or by bad weather—events, the Federal Reserve cannot control or easily predict.

So what is the Federal Reserve doing? At its June Open Market Committee Meeting, where Federal Reserve policy is set, the Fed stayed put on interest rates. Yet, it gave indications that it was considering giving in to the stampede for the Fed to act sometime this year to raise interest rates in a deliberate move to slow the economy. A policy to slow the economy is based on beliefs, not on the hard data before us on wages or inflation. This is regrettable.

The deeper reality is that the Fed took unprecedented moves to build up huge reserves of U.S. Treasuries. What is really going on is more that the speculators on Wall Street are nervous. They are afraid that somehow, from some unknown source, inflationary pressures will rapidly appear and the Fed will quickly unwind its position with, for some of them, disastrous consequences on bets they have placed on bond prices. They would prefer the certainty of having the Fed start to unwind its position now, slowly divesting itself of its bond reserves and easing the economy to higher interest rates. This has nothing to do with the economy, and everything to do with Wall Street speculation. Unfortunately, the press plays sycophant to these speculators, who are constantly quoted as giving “economic” advice when they state with certainty the need for the Fed to raise interest rates.

Sources of global instability abound. The discussions over the Greek debt, the Eurozone bankers and the International Monetary Fund are far from a workable solution. In the meantime, the Swiss Franc is rising uncontrollably in response to that uncertainty. Iraq, Syria, Yemen and the ongoing conflict with ISL make the Mideast equally unpredictable. And, if snows were the issue in the first quarter, the California drought, the Texas floods and Midwest tornadoes so far this quarter should not make anyone confident that the current hurricane season is going to be a sleeper. Further incidents in Charleston and now Charlotte with violent attacks on African American churches and the constant stream of discontent with the ongoing and unresolved issue of police misconduct make the domestic situation equally volatile. With so many uncontrollable and unpredictable risk factors that could slow the economy, the fears of Wall Street speculators should and must take a back seat.

These risks are not all unrelated. A more robust U.S. economy will help the world economy and help reduce some risks associated with weak economic performance; especially in the Eurozone. And a more robust U.S. economy will hopefully speed job growth to reduce the economic tensions that overlay the raw social tensions domestically.

The Fed must expand its view of measures of full-employment. The Wall Street gamblers base their assumptions on full employment from a time gone by. For instance, economists today still persist in viewing the high African American unemployment rate as a “structural” issue, since African American workers are assumed to be so low-skilled they cannot find jobs in a modern economy. So, they ignore the warning signs that job growth is frail when the African American unemployment stalls, as it has, at around 10%.

In May, the unemployment rate for adult African American workers (those older than 25) with associate degrees was 5.6%, which was higher or about the same as the unemployment rate for white, Asian and Hispanic high school graduates. Those numbers are inconsistent with full employment. They indicate a market where employers are very free to pick and choose which workers they want. A faster growing economy will force employers to be less choosy.

The slow economy cascaded higher educated workers down into jobs that require less education. If the economy does not speed up, that misallocation of productive capacity could become permanent, as employers may continue to seek only college graduates to serve coffee. This costs us in loss productivity growth. It is another sign of a labor market that is not at full employment.

Locking in high African American unemployment and college degree requirements for entry-level jobs is not in the economy’s interest. And covering Wall Street bets isn’t either.


Dr. William E.Spriggs is the Chief Economist for the AFL-CIO.

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