The Federal Reserve announced on Wednesday (December 16) that it would raise policy interest rates by ¼ to ½ of 1 percent end the seven year policy of keeping Fed interest rates near zero, and would embark on a path of “gradual” interest rate increases in order to “normalize” interest rates. This announcement had been long expected by pundits, economists and the financial markets, and, more to the point, had long been pushed by Wall Street and their supporters.
It was telling that the first question asked by a reporter in Fed Chair’s Janet Yellen’s press conference following the announcement was not a question at all. The reporter blurted out a sigh of relief: “Finally!” he exalted. The Financial Times’ Lex Column headline: “U.S. Monetary Policy At Last”. In fact the financial media have been huge cheerleaders for a rate hike. In the months leading up to this announcement, much of the business press had been pushing for an increase. In September, when the Fed did not raise rates, much of the financial press ran headlines like the this Wall Street Journal headline: “The FED Blinks”. The Journal was not alone with phrases like: “the open market committee sat on its hands.”. Blinking and hands sitting: these suggest lack of courage, weakness and worse. Neil Irwin of the New York Times, personalized it to Janet Yellen with a headline on September 17: “Why Yellen Blinked on Interest Rates”
Well, yesterday, Yellen did not blink and the financial press and many economists and pundits were clearly pleased. Yet, as the thoughtful members of the press and economists pointed out, economic conditions are not much better, and in some ways are worse, in December, than they had been in September. Dean Baker of the Center for Economic Policy Research (CEPR) wrote almost immediately after the decision multiple reasons why data do not support a decision to raise rates: He points out that while the official unemployment of 5% is not particularly high, “most other measures of the labor market are near recession levels”. The percentage of the workforce working part time but who really want full time jobs is near the highs reached after the 2001 recession. The percentage of workers willing to quit their jobs to look for a better job is also at near recession highs. “If we look at employment rates, the percentage of prime-age workers (ages 25-54) with jobs is still down by almost three full percentage points from the pre-recession peak.” Finally, wages stagnation is still significant, even despite some recent low gains.
