The Fed Should Be Worrying About ‘Miss Effy,’ Not Inflation Ghosts

Isaiah J. Poole

Rev. Reuben Eckles is worried about what the Federal Reserve is going to do next.

He has a lot of reasons to, in fact – members of the New Day Christian Church in Wichita, Kan., where he is pastor. The decisions that Federal Reserve chair Janet Yellen and her board of governors make over the next few months could determine whether many of his members will be able to get of a cycle of unemployment, underemployment and poverty.

At a media conference call last month sponsored by the Economic Policy Institute, Eckles told the story of a 60-year-old woman people in the church call “Miss Effy.” He described her as “a beautiful woman who loves to take care of people” who had worked at a Boeing plant there until it was closed in 2012. Since then, she’s worked “odd jobs” but has been unable to get any full-time job, much less one that matched her salary at Boeing.

A couple of weeks ago, Miss Effy came to a church meeting and broke down crying.

“I can’t pay my tithes and offerings anymore,” Eckles quoted the woman as saying, “and she asked me, ‘Is God upset with me?'”

No, Eckles assured her. She was struggling through no fault of her own with an economy that does not yet have room for millions of people like those in Eckles congregation – some older people cut adrift after a lifetime of work, others young people trying to get a foothold in the labor market but finding no ladder for them to climb.

With conservatives in Congress forcing an austerity economics on the economy that is a drag on economic growth, it is critical that the Federal Reserve continue its role of standing in the gap, offsetting the damage being done by the bad policy decisions that led to the Great Recession and that have hindered the recovery.

The Federal Reserve did not make any dramatic moves last week when it issued its policy statement on economic growth. Its statement acknowledged there is still considerable slack in the labor market and they decided to keep in place its near-zero borrowing rates in an attempt to encourage borrowing for investment. Still, there is reason to be on guard against actions from the Fed that would make it even harder for people to find a job and make ends meet in a still-weak economy.

That’s why economist Dean Baker wrote a strongly worded column this week warning that “many economists, including some in policy making positions at the Fed, claim that the labor market is getting too tight” and as a consequence “they want the Fed to raise interest rates.”

“The part of this story that few people seem to grasp,” he writes, “is that the point of raising interest [rates] is to kill jobs.”

It’s basic economics, he goes on to write. If you raise the cost of borrowing, businesses will borrow less and consequently invest and spend less. That slows the economy and slows, or even reverses, job creation. If the economy grows too fast, on the other hand, the demand for goods and services accelerates beyond the economy’s capacity to produce them, and prices go up dramatically. That’s the inflation bogeyman that conservatives generally want the Fed to be on guard against.

The problem is, the inflation bogeyman is nowhere to be found, and the real thing that we should be fearing is the damage being caused by an economy with a labor market that has been too slack for too long. And the Fed has a legal mandate – albeit a weak one – to balance its concern about inflation with a concern for the impact of its policies on jobs, thanks to the Humphrey-Hawkins Full Employment Act.

The stakes, as Baker writes, are high. Last week, the Labor Department announced that the unemployment rate stood at 6.2 percent. Some economists see that rate as close to the lowest unemployment rate we can safely achieve in today’s economy without triggering a debilitating round of inflation.

“If higher interest rates from the Fed prevented the unemployment rate from falling below 6.0 percent, and the economy actually could sustain a 4.0 percent unemployment rate as it did in 2000, we would be preventing close to 10 million people from getting jobs,” he wrote. “In addition, we would be denying much of the workforce the opportunity to share in the benefits from economic growth in the form of higher wages.”

It is true that the most recent efforts of the Fed to keep the economy growing – its policy of asset purchases called “quantitative easing” – have done a lot more to inflate stock values on Wall Street than they have to boost the job prospects and wages of working class people on Main Street. But that is not an argument for the Fed to take its foot off the accelerator; it is a call for the Fed to turn the steering wheel.

The Fed should be considering strategies that put its considerable powers to work on behalf of creating solid jobs that will help rebuild the middle class. For example, why not, as our own Robert Borosage has suggested, have the Fed buy government bonds that would enable federal or state and local governments make infrastructure improvements, or offset other capital improvement costs?

It’s a discussion that should not be left just to the economists who keep looking for phantom inflation ghosts while overlooking the realities of economic struggle in their midst. The Fed’s bankers should be agonizing over people like “Miss Effy,” and we should make sure that the Fed keeps its focus on people like her.

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