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.