The Fed dodged its own bullet last week.
About a year and a half ago, I wrote that Federal Reserve chair Janet Yellen, who took the position in February 2014, had the right attitude for this profoundly responsible job. She believed in the importance of enough jobs – not with higher minimum wages, as most of her fellow Democrats believe, and not measured by dropping unemployment levels, a trap easy to fall into. Still, over the past several months there had been widespread speculation, along with a number of apparent information leaks, that the Fed might raise interest rates, which are still at 0.25% (Federal Funds), 0.75% (Federal Discount), and 3.25% (Wall Street Prime). At their September 17 meeting they did not, and released a statement saying they would wait until they have “seen some further improvement in the labor market” and are “reasonably confident that inflation will move back to its 2 percent objective over the medium term.”
Why was this the right decision?
First, since Yellen took office, core inflation, which measures price increases outside of food and energy, has indeed gone nowhere. Since March 2013 its measures have been, every single month, in a range from 1.57% to 1.96%.
Second, labor force participation, which tells more accurately how common it is for Americans to be working than any unemployment rate, has worsened. Since February 2014, the share of United States residents either working or officially jobless has fallen from 63.0% to 62.6%.
Third, while the number of technically unemployed has improved during that span from 10.9 million to less than 8.2 million, the AJSN, or American Job Shortage Number, has dropped only from 20.3 million to just under 18.1 million. That means the United States economy could still absorb over 18 million additional jobs.
Fourth, while the national debt has worsened only from $17.58 trillion to $18.39 trillion over the past 17 months, that difference alone, about $81 billion, still costs, for every 1% increase in interest, $810 million per year to service. The entire amount costs $183.9 billion for each 1%, or about 5% of the current annual $3.67 trillion federal spending. By comparison, the largest budget item, Medicare and Medicaid, consumes less than six times that.
All four of these facts mitigate toward leaving interest rates where they are. Together, they more than offset any argument for the opposite. Although the national money supply, whether measured by M1 (the total amount of cash, checking accounts, and traveler’s checks in the country) or M2 (the same, plus most savings accounts, money market accounts, retail money market mutual funds, and certificates of deposit under $100,000) has been increasing more, with M1 up 12.2% from February 2014 to August 2015 and M2 up 8.8%, the lack of inflation means wealth has been pooling up. That means the people and organizations holding it have no better choices, which, with a lack of business projects, means they are creating relatively few jobs. Facilitating more funds to be held by raising interest rates would mean an even smaller number of work opportunities.
We have not been in a recession since June of 2009. That’s now six years and three months ago. The number of net new positions has exceeded those needed by population increase for 11 of the past 12 months. Wages, at least recently, have gone up more than inflation more months than not. Yet with 18 million jobs short we can hardly call our economy robust.
In all, however, given that we are in a permanent jobs crisis with nowhere near enough positions for everyone who wants one and no resolution for that in sight, times are good. So why should we mess with them? In Robert Townsend’s business classic Up the Organization, he proposed a generous and escalating commission scheme for salespeople, and then wrote “Don’t modify it if some hot salesman brings down the chandeliers and earns a fortune. That’s what you wanted, dummy.”
The Federal Reserve Board confirmed for us last week that they are not dummies. That is a good thing, and it should continue, even if some people are still itching for change for change’s sake. As long as the numbers above do not significantly worsen, interest rates should stay the same – no matter how much time passes.