Fed, facing populist anger, embraces ‘those left behind’ by economy

President Donald Trump has been hounding the Federal Reserve for months to cut interest rates, but the Fed's recent moves to ease borrowing costs may be more of a victory for its critics on the left.

Progressive activists and some Democratic lawmakers have waged a campaign for years to convince the central bank that keeping rates low would not stoke inflation and would help more Americans share in the nation’s prosperity.

While Trump has pressed for lower rates to help him wage his trade wars and turn the economy into a “rocket ship” as he embarks on his reelection campaign, Fed Chairman Jerome Powell has increasingly focused his statements on giving a leg up to the disadvantaged.

“We’ve seen it over time, not just with Powell but also with [former Chair Janet] Yellen and at some of the regional [Fed] banks as well: greater attentiveness to how people are actually living in the economy,” said Connie Razza, who oversees the Fed Up Coalition, made up of advocacy groups and unions.

Razza cited the Fed’s heightened attention to unemployment within different segments of the economy, including among black and Hispanic Americans. “That matters to how they’re able to understand the economy and the experience of workers,” she said.

To be sure, the Fed can also gain some much-needed political capital by talking more about ordinary Americans. The central bank was scorched on the left and the right for taking action during the 2008 credit crisis to save Wall Street and boost wealthy investors, while millions of families lost their homes. Now, as the central bank sustains relentless attacks from Trump, a perception that it's out of touch could prove risky amid a backlash against elitist, insular institutions.

But the relative strength of the economy — and the absence of inflation — also gives the Fed more room to ease monetary policy while sending the message that growth should reach as many people as possible.

“People who live and work in low- and middle-income communities tell us that many who have struggled to find work are now getting opportunities to add new and better chapters to their lives,” Powell said in his press conference last week. “This underscores for us the importance of sustaining the expansion so that the strong job market reaches more of those left behind.”

Asked by Rep. Alexandria Ocasio-Cortez (D-N.Y.) during congressional testimony whether the central bank had been wrong in its estimates of when inflation would show up following the 2008 crisis, Powell surprised many viewers by responding: “Absolutely.”

It was a striking admission that’s borne out by the data — at an unemployment rate of 3.7 percent, inflation is still hovering below the Fed’s 2 percent target — and it’s also gratifying for progressive activists who urged the central bank to take it slow on hiking rates.

Powell telegraphed the Fed’s thinking after a landmark June conference in Chicago in which the central bank solicited input on how it could improve its policies. Beyond the slew of granular academic papers presented, the conference included two panels intended to convey the real-world implications of that question.

Powell has repeatedly cited his takeaways from those sessions and other similar interactions at “Fed Listens” town halls across the country.

The dilemma facing the Fed is that it has a unique mandate that requires it to encourage as much job and wage growth as possible without leading to runaway inflation.

“When there are two objectives, not one, it’s always in the end come down to -- we have to also worry about inflation," Yellen said in an interview. "And that places some limits on how far you can go.”

The central bank has lingering bad memories from the 1970s, when interest rates were kept too low for too long and prices rose out of control, requiring former Fed Chairman Paul Volcker to raise rates as high as 20 percent to combat inflation. More than 40 years later, the Fed is beginning to accept that the world has changed.

“It is new that as the labor market’s gotten tighter and tighter, there hasn’t been an uptick in inflation,” Yellen said. “And so, there’s more scope to let the labor market become even tighter.”

Still, there are risks, other than inflation, in keeping rates low; namely, with borrowing costs already low, investors might decide to put their money into riskier assets that offer a higher rate of return. These so called high-yield investments include lower-grade corporate debt and other risky loans that have risen in volume in recent years and could create significant problems if a sharper slowdown forces defaults.

“We know easy money can cause bubble-like behavior, and we know when bubbles burst, the effects of the burst can be felt most dramatically on the shoulders of workers,” said Sarah Bloom Raskin, a former Fed governor and former deputy Treasury secretary under President Barack Obama.

The Fed’s most salient reasons for cutting rates are also separate from the strong labor market; at his press conference, Powell cited a desire to head off a slowdown from escalating trade wars and weak global growth, as well as a need to nudge inflation back up to 2 percent.

While the Fed is pointing more to poorer people as a reason why sustaining the expansion is so important, “they haven’t leaned heavily into the argument that the rate cut is also for the purpose of bringing about wage increases,” Raskin said.

“Will the rate decrease translate into higher wages, and will higher wages translate into more inflation?” she added. “Those are two questions that we don’t know the answers to,” since interest rates are already low and unemployment continued to decrease even when the Fed was hiking rates last year.

Still, Yellen has been increasingly vindicated for her decision to allow rates to stay low for years after the Great Recession to boost employment, despite dire warnings from many economists, Republicans in Congress and Trump, himself, that she would foment runaway inflation.

The data today suggest the Fed could have even been more cautious, with inflation still muted and wages growing only modestly. In 2017, former Chair Yellen described the low rate of inflation as a “mystery,” a question the Fed is still grappling with under Powell.

But the central bank is starting to adapt by getting a bit less nervous about having a low unemployment rate.

“We don’t have any evidence for calling this a hot labor market,” Powell told Congress last month. “To call something hot, you need to see some heat.”

St. Louis Fed President James Bullard said he expects continued job gains in the second half of the year, fed by easier monetary policy, and looks for more people to come in off the sidelines into the labor force.

“Lower unemployment rates by ethnic group that traditionally had higher unemployment rates, I think those are coming down, so that’s an excellent development,” he told reporters this week. “You’re getting people into jobs, and they develop skills that will protect them a little bit when there’s the next downturn.”