The stated objectives and the consequences of a Fed increase

The Federal Reserve Board and members raised the Fed Funds rate by .25% recently prompting pushback by Dean Baker at the Center for Economic and Policy research. His article, “The Job Cremators” is a good argument for the Fed to dwell a little longer on its other mission; to keep the rate of unemployment as low as possible. Baker gives a good historical account of a 1994 meeting he had with (now) Chairwoman Janet Yellen and another Board member, Alan Blinder at a time when most economists believed that a 6% rate of unemployment was a good target for the Fed.

Baker recounts how the Fed did not heed his argument that lowering the unemployment rate target just one percentage point (to 5%) would have the greatest impact upon middle and lower income workers, that any inflation that resulted would be minimal, and that the Fed could always raise rates later in the event of an inflation spike. The Fed raised its rates from 4% all the way to 6% by the end of 1994. However, heedless of the financial industry’s concern about an “overly tight labor market”,  in 1995 then Chairman Alan Greenspan “pushed through lower interest rates” even though unemployment was still below the 6% target. Students of economic history know that an economic and market boom ensued. Baker tells of how this resulted in record low unemployment with the marginal workforce such as teenage black workers benefited greatly. Baker shows that by the year 2000, inflation was still less than 2% while unemployment rates were still averaging 4%. This experience served to lower the target unemployment rate by two full percentage points to 4%.

A casual observer might ask, if the cause and effect is so straightforward, and the public benefit so undeniable, why then, does the Fed worry so much about inflation? The answer lies in the very good description of the makeup of the Federal Reserve Board (seven members) and the Federal Reserve Bank’s 12 regional bank presidents, together making up the Federal Reserve Open Market Committee. Baker points out that “…The process by which the regional bank presidents are picked is complicated, but it is dominated by the banks in the region. Unsurprisingly, bank presidents tend to represent the interests of the financial industry.” Baker also points out that the interests of the industry are to keep the debt obligations to those banks as heavy as possible and that inflation reduces the buying power; hence the value of those debts owed to the banks.

So, the reader is faced with the conclusion that it is the dominance of the banks that, (excuse the pun) trumps the public good that comes with a “tighter labor market” the so-called harbinger of inflation. Is it possible to have a monetary reserve system that is not controlled by  banks that except on rare occasions ensures that banks are profitable and that millions of workers stand idle with want?