The Fed doesn’t have to cut rates — but it can in order to help the middle class

It’s not often that Donald Trump, Alexandria Ocasio-Cortez and the stock market all agree on something — but now they’re of one mind about lowering interest rates as soon as the Federal Reserve’s next meeting at the end of this month, even in a near full-employment economy.

And whileI don’t love it, I can live with it — and you can too.

There are two reasons to cut rates, at any given time — because you can, and because you have to. Inflation hawks and those temperamentally prone to look for the next bubble press for rate cuts only when they’re necessary — in extreme cases like 2008, or a more-moderate slowdowns like the one following 2000’s tech-stock bust.

Now we’re at a time whereFed Chair Jerome Powell signaledWednesday that the central bank will cut rates mostly because it can — there are no bubbles, and inflation is nowhere in sight. Markets will love it — but the real reason to do it is the one that Rep. Ocasio-Cortez keeps talking about.

To understand why, first pull back the camera and look at inflation.

In the near term, we all note the Fed’s repeated observation that inflation is below the central bank’s 2% annual target — which officials are showing signs of flexibility about. After a long stretch of sub-2% inflation — excluding volatile food and energy prices -- the Fed’s may be prepared to tolerate 2.5% inflation if it would serve some other goal.

And maybe it should.

The last time core inflation rose 2% for a full calendar year was 2007. The last time it topped 2.3% — a rounding error above the target, and more than covered by the language about symmetry -- was in 1993. Justin Bieber and Giannis Antetokounmpo, born in 1994, have literally never seen 3% core inflation. The average since 2009 has been 1.6%.

That’s why the Fed can cut rates, if it wants to. It helps that the ongoing, world-changing revolutions in energy (first, hydraulic fracking for oil and gas, followed by the rapidly declining prices of renewable power and electric-vehicle batteries) promise a secular brake on inflationgoing forward.

The bubble cases aren’t very convincing — unless the Fed makes them so by raising interest rates. Real estate brokerage Redfin RDFN, +1.11%  is reporting that bidding wars for housesare much less common than a year ago. Consumer debt burdens are heavy if you look at the amount of debt they have, but very light if you look at the monthly payments, lightened mostly by low rates.

Data is harder to find about corporate debt burdens, but the same pattern likely holds.

Even leveraged loans, the heart of the next-bubble case, are sitting on default rates that are about one-third of the historical average. And falling.

So, clearly, you can have low rates, even lower than we have now.

But do we have to?

Traditionally, the answer would be no. The unemployment rate is 3.7%, only 6 million workers are unemployed with 7.3 million job openings. Even discouraged workers who think they’re unemployable are down two-thirds since 2010 to 425,000, compared to a work force of about 163 million people. Real median household incomes are at a 20-year high, says Sentier Research.

The thing is, wage growth in this expansion is below average — and it’s making little dent in the long-term stagnation in real incomes around the middle, even as incomes near the top of the distribution have (by comparison) exploded.

That real median incomes have now risen 3% over 20 years, with a big dip between 2008 and 2012, is no great success. It’s actually a long-term failure. This is Ocasio-Cortez’ real point, about much more than monetary policy, and it’s a good one.

Ocasio-Cortez told Powell on Wednesday that the Fed has consistently kept unemployment too high out of an unfounded fear of inflation, keeping millions of people from obtaining a job.

Since 1980, we’ve seen middle-class incomes rise in expansions, and give back their gains (and then some) in downturns, leaving regular folks little better off (and many worse) than their parents in the 1970s. If the Standard & Poor’s 500 SPX, +0.23%  were at 1977-ish levels, moneyed classes would revolt.

Politics now is about a question no smaller than whether this is inexorable. Monetary policy is the battlefield, for now, since fiscal policy is at the whim of a president whose big ideawas cutting taxes for corporations and self-employed folks while not investing in education, energy transformation or infrastructure —which offer hope for more evenly-distributed growth.

The balance of risks is this: Keep rates low, or cut them some, and see if letting the economy run hot boosts real living standards for regular folks. It’s not certain — what is? — but low inflation and absence of obvious bubbles makes it a chance worth taking.

Trump wants lower rates because they’ll pump the Dow Jones Industrial Average DJIA, +0.74%  . But really, all Trump had to do to boost stocks was stop threatening trade warswith everyone from Canada to China.

It’s Ocasio-Cortez’s point that carries the day. Cutting rates to stave off a phantom recession is a bad idea (as Rex Nutting argues). Pushing them as low as possible to do important, historic work for working families isn’t.

Source: Marketwatch.com

Powered by NewsAPI.org

Keywords:

Federal Reserve System • Middle class • Donald Trump • Alexandria • Stock market • Interest rate • Federal Reserve System • Full employment • Inflation • Stock • Business cycle • Central bank • Economic bubble • Inflation • Inflation • Federal Reserve System • Inflation • Central bank • Inflation • Price • Federal Reserve System • Core inflation • Round-off error • Justin Bieber • Giannis Antetokounmpo • Core inflation • Energy • Hydraulic fracturing • Fossil fuel • Price • Renewable energy • Electric vehicle battery • Secularism • Economic bubble • Interest rate • Real estate broker • Redfin • Consumer debt • Corporate bond • Default (finance) • Unemployment • Job • Discouraged worker • Employability • Workforce • Person • Median • Household • Income • Wage • Economic growth • Economic growth • Real versus nominal value (economics) • Income • Middle class • Income • Probability distribution • Median • Monetary policy • Unemployment • Inflation • Middle class • S&P 500 Index • S&P 500 Index • Politics Now • Monetary policy • Fiscal policy • Tax • Corporation • Self-employment • Education • Energy transformation • Infrastructure • Economic growth • Risk • Economy • Real versus nominal value (economics) • Standard of living • Inflation • Economic bubble • Tax rate • Dow Jones Industrial Average • Dow Jones Industrial Average • Stock • Trade • Canada • China • Recession • Rex Nutting •