WASHINGTON, June 10, 2018 (BSS/AFP) – The US Federal Reserve this week
will raise the key interest rate for the second time in 2018, working to stay
one step ahead of inflation.
A hiring spree in May helped drive the unemployment rate down to levels
eerily similar to those recorded almost 50 years ago — just before an era of
high inflation and economic pain that many Americans still recall with a
shudder.
It took years of high lending rates for the Fed to rein in prices and see
growth restored in the world’s largest economy, and the central bank since
has been focused on avoiding a repeat.
Even before last month’s expectations-shattering jobs report — 223,000
net new positions were created and unemployment hit the lowest in 18 years at
3.8 percent — members of the Federal Reserve’s interest rate-setting Federal
Open Market Committee had signaled they were ready to move.
And even Fed Governor Lael Brainard, an influential voice who spent much
of 2017 urging fellow policymakers to wait before raising rates, has sounded
somewhat more hawkish of late.
She recently said gradual rate increases are now justified and downplayed
worries possible signs in financial markets of trouble ahead for the economy.
Recent data show the number of job openings now exceeds the population of
job seekers for the first time on record, dating back to 2000.
And in such a tight labor market, anecdotal reports collected by the Fed
show employers are having to raise wages to prevent other companies from
poaching their workers, re-hire retirees, or begin recruiting directly from
trade schools.
– Queasiness about unemployment –
It all adds up to an increase coming in the benchmark lending rate that
affects loans on cars, homes and everything else. Futures markets on Friday
put the odds of an increase next week at better than 90 percent.
“Labor force growth is well below where we’re seeing payroll growth. It
seems that unemployment’s going to get lower,” John Ryding, chief economist
at RDQ Economics, told AFP.
By year end the jobless rate could fall to 3.5 percent for the first time
since 1969, he said, and then go as low as three percent by the end of 2019 –
– which would be the lowest level since September 1953.
“The Fed wants to cool the job growth so that we don’t keep pushing the
unemployment rate ever lower,” Ryding said.
Fed officials likely would — and in the past have — argued with that
description, since they are focused on price stability and full employment,
but in practice central bankers are always wary of a very low jobless rate
since it will tend to push wages higher, and therefore raise prices.
The 3.5 percent unemployment rate in December 1969 was followed by a dark
period that included the “great” inflation of the 1970s, when US prices hit
their 20th century peak, sometimes exceeding 10 percent amid an oil shock,
and unemployment reached nine percent.
In today’s economy, rising oil prices, December’s sweeping tax cuts, a
weakened US dollar and synchronous global growth, not to mention a brewing
trade war with America’s largest economic partners, all suggest price
pressures could soon rise.
A June hike appears to be a sure thing and futures markets also are
betting on a third increase in September.
– A jump in inflation? –
But, while many economists now expect a fourth rate hike in December,
markets currently are split on the chances of this.
While signaling they will raise rates in June, Fed members also describe
their inflation target as “symmetric” — meaning they may let it run somewhat
higher than their two percent target to compensate for the six year stretch
during which it remained stubbornly low.
Ryding and other economists also say the link between unemployment and
rising prices is not a simple one.
“I expect it to have an impact but I think it’s just hugely exaggerated,”
said Dean Baker, senior economist at the Center for Economic and Policy
Research.
While inflation did rise following the extremely low unemployment rates of
the 1960s, it did not suddenly explode, but rose progressively instead.
And life for workers today is vastly different: the collapse of
unionization, declining bargaining power and the rise of outsourcing mean
that scarce workers do not always translate directly into higher pay and
mounting prices.
Current estimates for wage growth also show it is moving up slowly, just
ahead of inflation, so it is not fueling an acceleration of prices.
A key measure of the Fed’s preferred inflation gauge, the “core” Personal
Consumption Expenditures price index, held steady at 1.8 percent in April, no
higher than it was in November 2016.
Baker said if he had been asked to predict the rate three years ago, “I
would have said it would have accelerated.”