At its meeting on August 1, the Federal Reserve did not do anything very different. And that was news.
Under unprecedented direct criticism from the president of the United States, members of the Federal Open Market Committee, the Fed’s interest rate-setting body, approved a statement indicating that “economic activity has been rising at a strong rate.”
{mosads}In addition, the statement noted that the “stance of monetary policy remains accommodative.” In “Fedspeak,” this means that the Fed expects that it will need to raise interest rates to slow down the pace of the economy.
With inflation right around the sweet point of 2 percent, the Fed does not want things to get out of hand. The statement described “strong labor market conditions,” referring to a low unemployment rate, some signs of increasing wages and some employers having difficulties finding workers.
The Fed has been faced with the puzzle of modest wage increases at a time of low unemployment. In the past, such low unemployment has been coupled with much bigger pay increases. However, in Trump’s America, the bargaining position of labor is at an ebb.
Everything from the rise of the gig economy’s damaging effect on full-time work, Supreme Court and National Labor Relations Board decisions against organized labor and a host of regulatory reversals have worked against worker pay and security. As Jared Bernstein summarized in a nice New York Times op-ed recently, the puzzle might not be so puzzling.
Still, eventually the pressure of high demand in the economy and the hiring difficulties of employers will raise wages in some parts of the economy. The Fed does not want to wait around for that process to get too far, because it can become extremely difficult to slow down the inflationary spiral later.
The other intriguing bit of news in the Fed’s laconic reaction was the absence of any mention of increased tariffs. In his congressional testimony in mid-July, Fed Chairman Jerome Powell seemed to be unwilling to make strong predictions about the future course of events.
Increasing tariffs could raise prices and exacerbate inflationary pressures, but they could also lead to negotiations leading to a settlement. Powell emphasized that incoming data has not yet shown major impacts of the tariffs.
He wisely did not try to predict how the erratic, tit-for-tat tariff back and forth might end up. He did point out that protectionism usually hurts the country that employs it, a modest rebuke to the trade war policy.
However, it is very much worth noting that the tariff skirmishes have affected economic activity. In particular, U.S. soybean exporters have experienced a mini-boom as their Chinese customers loaded up on all the tariff-free soybeans they could get in anticipation of Chinese retaliation.
This, and some other, smaller export surges temper the impressive sounding 4-percent GDP growth figure for the second quarter. Tariff anticipation is a one-off that will not be repeated.
Fed officials, therefore, are calmly going ahead with their plans to raise interest rates steadily and firmly. They are not responding directly to political pressure. So far, there is no reason to question their assessment that the economy is surging forward. The political front is another question.
Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.