“Yellen Puts Fed on Path to Lift Rates,” reads the banner headline in the Wall Street Journal. The Federal Reserve’s chair Janet Yellen is intimating that it might begin to lift interest rates in the middle of this year. If so, its decisions over the next year could well lock millions of Americans out of the workforce, and insure that wages generally continue to stagnate.
That is why it is vital that President Obama act now to nominate someone with a clue about the real conditions of working people in this economy. The president recently announced that he would name the former chief executive of one of Hawaii’s largest banks to the Fed governing board, placating the small bank lobby. Now he should fill the final vacancy with someone who will represent America’s working families.
Progressives should be rallying support for the nomination of a leader like Larry Cohen, the dynamic retiring president of the Communications Workers of America, to the Fed’s governing board.
The Fed Rules
The Federal Reserve is the institution with the greatest influence over the American economy and the least accountability to the American people. Its Federal Open Market Committee – made up of the seven members of its Board of Governors plus the president of the New York Federal Reserve Bank and four rotating presidents from regional reserve banks – decides whether and when short-term interest rates will go up or down, and indirectly whether workers will find jobs available or scarce and whether they can exact wage hikes from employers or not. The Fed also is the often-AWOL lead regulator of Wall Street. Swept up in the deregulatory fervor of the last decade, its negligence contributed directly to the financial collapse that led to the Great Recession.
The Fed is legally mandated to pursue policies that promote maximum employment with price stability. Full employment is vital if workers are to share in the profits and productivity that they help to produce. When jobs are plentiful and workers in demand, workers can exact better wages and benefits from employers. Rebuilding a broad middle class and resuscitating the American dream depends in large part on sustaining a full employment economy.
But over the last decades, the Federal Reserve has largely been fixated on curbing inflation not on insuring full employment. Ideologically, this reflects a core myth of market fundamentalism that if prices are stable, job growth will follow. But the ideology simply justifies the ways the rules are rigged to benefit the few.
The reality is that the Fed is dominated by and beholden to Wall Street, not American workers or the administration in power. Bankers are creditors who value price stability above all. They drum up constant alarms about runaway inflation that ever looms on the horizon. They put constant pressure on the Fed to act preemptively against rising prices even before there are any signs of them.
The People Aren’t Represented
The Fed is structured to serve Wall Street and to be insulated from democratic institutions. Its Governors are appointed to 14-year terms (although few serve that long) in order to make them independent of any administration. Its Market Committee includes representatives of regional Federal Reserve banks, putting bankers at the table. The New York Federal Reserve Bank, Wall Street’s special preserve, has a permanent seat at the table. Its governors are lawyers, economists and bankers. Notably absent are any representatives of consumers or workers.
Moreover, the Fed wants to be treated as if it were a virginal clairvoyant, possessed of mystical insights. Presidents are instructed not to put public pressure on the Fed. Congress is warned to leave its books closed. Financial investors decipher the minutes of its monthly meetings like ancient Greeks puzzling over the pronouncements of the Delphic Oracle. When the Fed is raising interest rates and throwing millions out of work, its independence is heralded. Yet when Wall Street was on the verge of collapse, Federal Reserve Chair Ben Bernanke and the head of the New York Federal Reserve Bank coordinated directly with Bush and Obama’s Treasury secretaries to pump literally trillions into bailing out the big banks and other financial companies.
The resulting bias is apparent today. Ever since the Fed acted boldly to counter the collapse of the economy, the inflation hawks in the financial community have been issuing dire warnings of impending runaway inflation and the collapse of the dollar. With the Fed holding interest rates near zero for over six years in the face of mass unemployment and slow growth, the hysteria has steadily increased. And under that pressure, Yellen now suggests that the Fed will consider raising rates in a couple of months or so if the economy continues to grow.
But this economy is a far remove from healthy full employment. While the unemployment rate has declined, millions of jobless Americans aren’t counted because they’ve stopped looking for a job. Long-term unemployment rates are still higher than normal. Wages continue to stagnate, suggesting that jobs are scarce. Inflation, rather than spiking, remains below the Fed’s arbitrary target of 2 percent. Deflation – falling prices that slows the economy – is a much bigger worry than inflation.
Moreover, the rest of the world is a drag – deflation stalks Europe, China is slowing. The dollar isn’t falling, it is rising, with U.S. trade deficits rising with it. That costs jobs and undermines wages. If anything, the Fed chair should be urging Congress to act to boost growth, not raise expectations of rising interest rates that will slow growth.
Workers will never be able to capture a fair share of the profits and productivity that they help to generate if the Federal Reserve acts preemptively against inflation every time the economy nears full employment and workers start getting wage hikes.
We Need Accountability
Yellen not only knows this, but she says it repeatedly. She clearly wants to fend off the inflation hawks until there is some sign that workers are beginning to share in the recovery. But as the clamor from the financial community grows, she is beginning to bow to the pressure.
What we need is a Fed that is far more accountable to the people, instead of the plutocracy, to Main Street rather than Wall Street. Its emphasis should be on moving the economy to full employment with rising wages. It should not move to slow the economy when there is no sign of inflation. It should treat its arbitrary 2 percent inflation goal not as a ceiling but as a floor. There is no evidence that the U.S. has to worry about inflation spiking suddenly out of control. The Fed can allow a little inflation in pursuit of full employment and still act if it begins to rise too high.
The judgments the Fed makes are wrapped in mystery, garbed with arcane data about the economy, markets, money supply and velocity. But this is largely packaging designed to awe legislators and citizens. The Fed would like to be treated like doctors or rocket scientists, professionals who have a special expertise making complicated choices that the unwashed cannot understand.
In reality, the Fed is making fundamentally political decisions. Will monetary policy favor Wall Street over Main Street? Will it favor creditors over debtors? Will it empower workers with full employment or CEOs with surplus cheap labor? Will it put its thumb on the scale to favor working people or bankers?
That’s why the president should nominate Larry Cohen, or someone like him, to the Board of Governors. Cohen is a brilliant leader, well versed in the reality facing workers in this economy, and expert in its growing high-tech, communications sectors. And, no shrinking violet, he is unlikely to be cowed by the pressure of bankers or seduced by the Fed’s sumptuous quarters and arcane rituals. His nomination, of course, would get a hostile reaction from the Republican majority in the Senate that has to confirm it. But the debate itself would help inform Americans about the stakes involved.
As the Fed moves towards making decisions about whether millions of Americans will get jobs or pink slips, and whether wages will rise or continue to stagnate, American workers deserve a voice at that table. The Fed should be reformed fundamentally to make it more democratically accountable. But even without that, the president can and should act now to open the Fed’s governing board up to voices that it seldom hears.