Amid Stagnant Wage Growth and Weak Recovery, Fed Rate Hike Would be 'Mistake'

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Amid Stagnant Wage Growth and Weak Recovery, Fed Rate Hike Would be 'Mistake'

With Federal Reserve interest rate increase on the horizon, workers' paychecks and livelihoods hang in the balance

Federal Reserve Chairman Janet Yellen is guiding the Fed towards its first rate rise in a decade. (Photo: Day Donaldson/flickr/cc)

It's almost certain that the Federal Reserve on Wednesday will raise a key interest rate for the first time in almost a decade, a move critics warn will slow the economy, chip away at workers' bargaining power, and raise consumer borrowing rates.

The Fed's benchmark interest rate, used to set terms for many consumer and business loans, was cut to just above zero in 2008, and has stayed there ever since. Now, some economists—along with Wall Street and big banks—say that falling unemployment and a strengthening economy signal it's time for a gradual rate increase.

But progressive economists have been sounding the alarm for months, saying "a rate hike would set in motion a slowing down of economic growth before that growth could lift the fortunes of millions of people still looking for work or whose wages have stagnated because the labor market is not tight enough," as Campaign for America's Future's Isaiah Poole wrote in September.

"I think this is a mistake," said Josh Bivens of the Economic Policy Institute in a briefing earlier this month with U.S. Rep. John Conyers (D-Mich.).

Bivens explained: "You should raise interest rates only when you think you need to start slowing the pace of economic growth because you’re worried that fast growth and falling unemployment will spark too-rapid wage growth that will bleed into rapid price inflation. But there’s no reason to think that the pace of economic growth today is excessive and needs to be slowed because of incipient inflation."

Furthermore, Bivens continued, "the stakes to getting this trade-off between low unemployment and stable inflation wrong are huge."

Those stakes involve nothing less than the pace of economic recovery and average Americans' standard of living.

Keeping rates low, on the other hand, "will help the most marginalized and disadvantaged," wrote Kevin Cashman, program assistant at the Center for Economic and Policy Research (CEPR), on Monday.

"For example, the gains from lower unemployment will disproportionately help black workers," he said. "History provides more reasons for keeping rates low: black workers were hit much harder than whites, Asians, or Hispanic/Latinos in both the 2001 and 2007 recessions. In addition, the incomplete recovery from the 2007 recession is on top of an incomplete recovery following the 2001 recession."

In a separate piece published Monday at Fortune, CEPR economist Dean Baker noted that raising the interest rate could have a "huge impact" on workers' paychecks.

A slew of measures, such as the number of people involuntarily working part-time jobs or the employment to population ratio, "indicate a labor market that is far from full employment," Baker wrote. He continued:

In this case, if the Fed were to decide to allow the labor market to tighten and workers to gain bargaining power, we would see an increase in the labor share, presumably getting back to pre-recession levels. The more rapid wage growth would mean somewhat higher inflation, but since the inflation rate has been extraordinarily low for the last six years, a modest uptick in the rate of inflation would be desirable.

[...] On the other hand, if the Fed raises interest rates enough to prevent the wage share from rising, it will mean a massive hit to workers’ wages. If we assume the wage share should be 80.0% and Fed policy keeps the wage share at its current 74.5%, the Fed has effectively imposed a 6.9% tax on wages.

"Before any of the members of the Federal Open Market Committee vote to raise rates, they need to look at the actual data and consider how it corresponds to our lives and struggles," wrote Shawn Sebastian, a campaign manager at Fed Up, a coalition of community and labor-based organizations that works to bring the voices of low-income communities of color into decisions on monetary policy, in an op-ed on Tuesday. 

Wage growth and inflation both remain below the Fed's targets, Sebastian argued, suggesting that the institution's decisions "are value-driven, not data-driven."

"Do black lives and livelihoods matter to the Fed?" he asked. "Do they matter less than non-existent inflation? Should low-income families get a chance at a raise and better working conditions? Or should millions stay underpaid and overworked because of potential inflation? If the Fed is truly data-driven, the hard numbers reflecting the reality of persistent labor slack should outweigh inflation that is not yet real."

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