The Fed Will Continue to Support the Recovery—But For How Long?

The Fed Will Continue to Support the Recovery—But For How Long?

This afternoon, the Federal Reserve announced that it will keep interest rates near zero for the time being, maintaining its critical support for the sluggish economic recovery. The decision came as a surprise to many observers on Wall Street, including analysts at Citigroup, Bank of America, and JPMorgan Chase, who expected a rate hike to be announced today. But citing instability in the financial market and the global economy, the Fed said today it would not raise rates in the short term. Some six years after the recession officially ended, today’s decision is a sign that the economy is still far from recovered.  

The decision comes less than a month after Fed Up, a nationwide coalition of economists, union members, and grassroots activists, descended on the central bank’s annual symposium in Jackson Hole, Wyoming, to demand that the Fed not abandon its role in the recovery. As I reported last month for The American Prospect, Fed Up organizers cited large racial gaps in unemployment and poverty as well as paltry wage growth as indicators that the recovery has yet to reach millions of communities, particularly those of color. During the symposium, the coalition held teach-ins on economic policy and delivered a petition to Fed leaders demanding they hold off on a rate hike until more Americans had a chance to feel the recovery.

“This is a victory for the working families who stepped up with innovative organizing to send the Fed a clear message: Our voices belong in the debate about our economy,” said Fed Up Director Ady Barkan in a statement today. “With the recovery still far too weak in too many communities, it would have been economically devastating—and immoral—to slow the economy.”

Although indicators like unemployment are near pre-recession levels, as economist Josh Bivens argues, there’s plenty this number keeps hidden, particularly the number of people who have given up looking for work. Today, the employment-to-population ratio for prime-age adults is less than half of where it was in 2008 as millions of workers remain unable to find employment. Bivens and his colleagues at the Economic Policy Institute refer to these people as “missing workers.” Wage growth, Bivens adds, has been similarly pessimistic, barely keeping pace with inflation.  

And even these modest gains have been dramatically uneven. According to Census data released this week, the poverty rate among black Americans is more than two-and-a-half times the rate for whites, and has actually gone up over the past year. Similarly, black unemployment and underemployment has remained at more than twice the rate for whites.

It’s groups like these that would feel an interest rate hike most dramatically, Bivens said in a statement today. “Tightening before the economy has reached genuine full-employment is not just a mistake,” he said, “it’s a regressive mistake that would hurt the most vulnerable workers—low-wage earners and workers from communities of color—the most.”

“Today’s decision by the Federal Reserve to keep short-term rates unchanged is welcome,” Bivens added.

But the Fed’s reasoning for keeping interest rates low doesn’t seem to have much to do with issues like racial inequality or unemployment—in a statement released today, the Fed cited “solid job gains and declining unemployment” since the central bank’s last meeting in July. Rather, the Fed seems more worried about “recent global economic and financial developments” that could hamper growth.

In a press conference today, Fed Chair Janet Yellen reiterated that “the recovery from the Great Recession has advanced sufficiently far, and domestic spending is sufficiently robust” to warrant a rate hike now, but “in light of the heightened uncertainty abroad ... the committee judged it appropriate to wait.”

Moreover, the Fed still expects to raise interest rates by the end of this year, whether or not the job market sees much improvement. Over the past few months, Fed governors have hinted strongly that a rate hike would come by the end of the year, and many analysts expect an interest-rate hike at upcoming Fed meetings in October or December. If the Fed is serious about supporting a broadly shared recovery, it should hold off on this rate hike until more Americans have a chance to feel the recovery.