Claudio Bresciani/TT News Agency via AP
Federal Reserve Chair Jerome Powell participates in a panel during a Central Bank Symposium at the Grand Hotel in Stockholm, Sweden, January 10, 2023.
Top Federal Reserve officials meet again today and Wednesday to determine interest rate policy. Leaks suggest that the policy-setting Federal Open Market Committee will hike rates this time by “only” a quarter-point, down from higher previous increases. This is billed as progress.
Judging by what’s happening with the economy, the Fed should be cutting rates, not raising them further. GDP growth for the fourth quarter was at an annual rate of 2.9 percent, down just a bit from 3.2 percent in the third quarter. That means the economy is on track for the elusive “soft landing”—an end to inflation but not a recession—and without any more Fed rate hikes.
Fed Chair Jay Powell is obsessed with the labor market, and uses wage increases as evidence that the Fed should continue tightening. But a closer look suggests that real (inflation-adjusted) wage increases are just where they should be.
Real wage boosts are concentrated at the low end of the labor market, where onerous, underpaid jobs have trouble attracting workers at going rates of pay. That’s why famously shabby employers in those sectors are having to raise wages. For instance, Walmart has just raised its lowest starting wage from $12 to $14 an hour. But no serious person believes that raises such as these drive the general rate of inflation.
According to the Labor Department, median weekly wages in the fourth quarter of 2022 were 7.4 percent higher than they were a year earlier, while prices measured by the Consumer Price Index were 7.1 percent higher. So the median worker actually got a minuscule raise of 0.3 percent adjusted for inflation.
But productivity growth is around 1.5 percent—and that justifies real raises, because it implies that production is staying well ahead of wage increases. If anything, workers actually should be getting larger pay boosts to keep up with the value of what they produce.
It’s also clear that wage increases are decelerating, as are price increases. Labor compensation grew at an annual rate of 4.9 percent in the fourth quarter of 2022, compared to an increase of 3.9 percent in prices. Factor in productivity growth, and that’s just about right.
The really good news is the story at the bottom of the job market. The bottom tenth of workers saw their pay increase by just under 10 percent—an inflation-adjusted raise of almost 3 percent. Weekly pay for young workers, between 16 and 24 years of age, also increased by about 10 percent. And the median wage increase for African American workers employed full-time was over 11 percent.
These gains in the worst-off segments of the workforce are one of the benefits of tight labor markets. Would the Fed kindly leave well enough alone? These long-overdue gains for chronically underpaid workers do not drive inflation.
When Larry Summers first began attacking Biden’s stimulus program as having caused the inflation, one of his strategies was to ridicule those who pointed out that the inflation was mainly caused by supply chain bottlenecks and shifting consumption patterns in the pandemic. The latter group described the inflation as “transitory.”
Three percent inflation is both achievable and perfectly sustainable.
When the inflation persisted well into 2022, Summers heaped scorn on “Team Transitory,” and doubled down on his calls for higher interest rates and an engineered recession. Summers was hailed as prophetic.
Now it turns out that those who described the inflation as transitional were the prophets, and Summers was the goat. The inflation in fact was not macroeconomic; it was indeed largely caused by particular supply chain difficulties that are being resolved. The transition just took about six months longer than expected.
One of those who initially believed that the inflation was transitory was Fed Chair Powell. He is now overcompensating for his earlier views, by setting an unrealistically low long-term inflation target of 2 percent, and needlessly driving the economy into the ground in order to reach it.
We likely can’t get down to 2 percent without a recession. But 3 percent inflation is both achievable and perfectly sustainable—indeed, it’s lower than in the mid-1980s when Ronald Reagan declared it was “morning in America.”
Powell’s wrongheaded analysis and prescription suggest why we need thoughtful counterweights on the Fed staff and the Board of Governors. One such economist is Fed Vice Chair Lael Brainard.
In recent days, there have been leaks that Brainard is the leading contender to succeed Brian Deese as director of the National Economic Council. As I’ve pointed out, this makes no sense.
Biden needs Brainard more at the Fed. Moving her out now would create a vacancy that would last for months, and it would be hard to get the Senate to confirm someone as progressive as Brainard.
Whether the Fed will sink the economy, or promote the recovery that Biden needs in 2024, will be decided at the next two or three meetings of the Federal Open Market Committee. We need progressive Fed governors at full strength, and we need them to speak with louder voices.
