Fed’s fear of inflation prevents workers from getting paid

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Federal Reserve policy today includes many known unknowns and many unknown unknowns, as former Secretary of State Donald Rumsfeld might have called them. 

We don’t know, for example, what the “natural unemployment rate is.” Not too long ago, it was thought to be much higher than the current 3.9 percent. We also don’t know why wages aren’t rising more quickly. Minneapolis Fed President Neel Kashkari rightly calls the unemployment rate a “broken gauge.” 

We’re not even a year away from previous Fed Chairwoman Janet Yellen saying that inflation’s low level was a “mystery,” and while it’s higher now, it’s still a bit of an enigma. 

The big worry by some Fed officials is out-of-control inflation in the distant future — a boogeyman of a scare especially considering GDP is forecast to drop over the next couple years, and weak real wage growth isn’t budging prices. 

All this makes for shaky Fed policy calculus. But we also know several known knowns — severe economic problems that Fed policy could help fix by just keeping a light finger on its rate hike trigger. 

We know that wage and income inequality are deep and worsening problems. Purchasing power for the average American is the same as it was in 1978, according to data from the Bureau of Labor Statistics. Based on what we’ve seen in previous expansions, wages should be much higher than they are now. 

We also know there’s a wide skills gap, as employers say a major slice of the close to 7 million job openings now could be filled if workers had up-to-date training and education. Judging by past expansions, it’s a safe bet that these problems can be significantly reduced the longer and hotter we allow this expansion to run. 

In fact, we’ve begun to see the signs of what a longer, strong expansion could bring, though not yet at level that would make a real dent in these known knowns. Employers are offering more job training programs.

Hundreds of thousands of Americans once thought to be permanently out of the labor force are now joining the ranks of the employed. Also, wages are starting to creep upward, though it’s still too soon to tell if wage increases will match those of previous expansions. 

But the rhetoric surrounding those increases is often framed by rate hawks as “wage inflation,” as if higher wages are a bad thing when inflation is tame. That shows workers’ welfare doesn’t have a spot in the calculus beyond the Fed’s full employment mandate.

Unfortunately, many employers — those who evidently aren’t hiring and training workers or offering to pay for new skills for existing workers — complain of how “tight” the labor market has become. Newsflash: If we’re still hiring 200,000 workers a month, these employers either aren’t paying enough or training enough. 

Given the economy’s strength, low inflation and low interest rates, we stand in a unique position to better the lives of tens of millions of American workers and improve GDP at the same time.

Conditions haven’t been this ripe for perhaps 30 years — since just before the 1990 recession. The Fed just needs to let the economy run even if that means higher inflation for a time. 

Aaron Sojourner, a labor economist at the University of Minnesota, told me recently, “It’s been so easy for so long for employers just to put up an ad and people flood in. A bias has crept in that you don’t have to invest in people.”

Fortunately, Federal Reserve Chairman Jerome Powell acknowledges that real wages, especially for medium- and low-income workers “have grown quite slowly in recent decades,” and “economic mobility” has declined.

Other Fed officials have echoed those sentiments, though others are insisting on raising rates to ward off the inflation boogeyman. 

Powell is a pragmatist and avoids forecasting in favor of real-time data; that could mean he’ll opt to let the economy run hotter and longer. But Powell, as Fed chairs have before him, stops short of saying Fed monetary policy can help workers beyond helping us reach full employment. 

It may not be one of the Fed’s mandates, but this boon to workers is within its power to grant. A better-paid, better-trained workforce would also pay dividends to companies. Better skills mean more productivity and higher (non-inflationary) profits, and higher wages mean more demand and fatter bottom lines. 

All that’s needed is to let the economy fix wage and skills problems and make wobbly economic models take a back seat to pragmatism and to putting workers first. 

Robert Frick is corporate economist for Navy Federal Credit Union, the world’s largest credit union. He can be followed on Twitter @RobertFrickNFCU.

Tags economy Full employment Inflation Janet Yellen Labour economics Macroeconomic policy Macroeconomics Monetary policy Natural rate of unemployment Unemployment

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