What is it with the Federal Reserve? Anticipating a decent job-creation rate, Chair Janet Yellen told Congress Wednesday that the central bank is likely to hike interest rates next month after all.
According to the Labor Department's latest jobs report released Friday, unemployment ticked downward in October to 5.0 percent and wages actually increased a tad -- by 0.4 percent -- after eight years of flat or declining wages for most workers. Terrific -- this is the kind of benign inflation we need more of!
Surely Yellen knows -- and has said -- that these monthly numbers bounce around, and that the economy is nowhere near experiencing the kind of inflationary pressures that would justify slowing a recovery that is finally, belatedly, getting into a higher gear.
But even though Yellen is far more sensitive to the need for job and wage growth than most Fed chairs, she is just one vote out of twelve voting members of the policy-setting Federal Open Market Committee (FOMC). And the Fed is running true to form: As soon as the recovery starts trickling down to regular working people, time to apply the brakes.
As I've written in previous posts, several factors are at work here.
First, many top officials at the Fed are far more orthodox than Yellen. She has struggled to keep a working majority on the FOMC as the money markets and the conventional wisdom have clamored, with increasing intensity, for a rate hike.
The leader of the inflation hawks at the Fed is the vice chair, Stanley Fischer. In a long career, which includes academic posts as well as senior positions at both the International Monetary Fund and the World Bank, as well as at Citigroup and serving as governor of the Bank of Israel, Fischer has epitomized the orthodoxy.
Obama appointed Fischer as Yellen's deputy in part to appease the usual suspects who were appalled that Obama was pressured into appointing Yellen over Larry Summers. So if Yellen has moved into the rate-hike camp, it is partly to be on the winning rather than the losing side of the next FOMC vote.
That said, even if the Fed kept interest rates at effectively zero for another year, it's increasingly clear that monetary policy alone is not sufficient to get unemployment rates down to where they need to be -- or to translate falling jobless rates into raises for workers. During the past few decades, there have been momentous changes in the structure of employment.
Unions are weaker than they have been since before the Wagner Act of 1935. The combination of outsourcing, union-busting, and the creation of part time, temp, contract and on-demand jobs as the new normal means that a low nominal unemployment rate doesn't produce the pressure for wage increases that it once did.
Plus, the Obama Administration has colluded with the Republicans in believing that we need more deficit reduction. So liberal monetary policy collides with overly tight fiscal policy, as well as trade policy that will promote more outsourcing and export of good jobs.
In short, unless we get major reforms in labor markets, to protect workers from the on-demand economy, plus massive public investment to create millions of good jobs, whether monetary policy is a little tighter or a little looser won't be a game changer. Still, raising rates eliminates one of the few sources of economic stimulus that we have.
The fact that inflation phobia has been consistently disproven by events for seven years has not stopped the monetary hawks. The fact that a progressive economist like Yellen has been prodded into embracing a rate hike is testament to the immense undertow of the conventional wisdom.
The November jobs report will be released December 4. If the news is so-so, we may be spared a premature rate hike. If the news from the labor market is good, the news from the Fed will be bad.
Robert Kuttner is co-editor of The American Prospect and professor at Brandeis University's Heller School. His latest book is Debtors' Prison: The Politics of Austerity Versus Possibility.