When the world’s central bankers meet this week in Jackson Hole, Wyo., the topic on the table will be how to foster a dynamic global economy. For America’s central bank, the Federal Reserve, the biggest problem is at home, not abroad, and its latest view on the economy, released last week, shows it may not have a handle on it.
As Fed officials try to make sense of how low unemployment, which should drive up wages and prices, persists side by side with low inflation, most simply assume that inflation will rise by next year as labor demand lifts wages and higher wages lead to rising prices. This belief has led to two interest rate increases so far this year, in effect tapping the brakes on growth to fight inflation, with another rate increase expected this year. A more plausible view is that persistently low inflation shows the economy is more fragile than policy makers want to admit, and needs to be helped, not handicapped.
Core inflation, which excludes volatile food and energy prices, has fallen short of the Fed’s 2 percent target every month for five years, and decent pay raises for most working people have been few and far between, even as unemployment has dropped by nearly half, to 4.3 percent. The Fed has had to continually pull back its inflation projections.
Another sign of weakness is that eight years into an economic expansion, the share of employed workers ages 25 to 54 is less than before the Great Recession.
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Much of this is beyond the Fed’s control. Among the barriers to employment are the rising use of opioids and dismal job prospects for people who have been arrested or imprisoned. Better drug treatment and health care, and sentencing reform, could help, but they are not within the Fed’s purview. The Fed also cannot create a plan to bolster jobs by rebuilding the nation’s infrastructure. Nor can it enact an immigration plan to compensate for an aging population and smaller labor force that can restrict economic growth.
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The Fed is also not responsible for advancing labor standards that help to lift wages. Republicans oppose a meaningful rise in the minimum wage, which was already inadequate when the current $7.25 hourly rate took effect in 2009. The Trump administration is undermining an Obama-era effort to lift middle-class pay by updating rules for paying time-and-a-half for overtime to salaried workers.
Source : https://www.nytimes.com/2017/08/22/opinion/fed-inflation-interest-rates-workers.html