What do the Fed and Madonna have in common?

Economy / July 24, 2022 / DRPhillF / 0

Economists at the Federal Reserve are working hard to maintain the institution’s reputation as an unwavering pillar of economic wisdom — unaffected by the politics or whims of the day, it is fully informed, and most importantly effective. This image obsession serves an important purpose: the central bank’s reliability depends on Americans’ belief that it is…reliable.

This is no secret. In the June meeting minutes, officials noted that strong credibility and communication “helped change market expectations for future policy and have already contributed to a marked tightening of financial conditions that is likely to help reduce inflation pressures by constraining aggregate demand.”

If Fed Chair Jerome Powell says the Fed will lower historically high inflation, Americans will believe it and change their behavior to reflect it. It’s a self-fulfilling prophecy, the Fed’s version of the secret.

But perception doesn’t always align with reality, and Fed economists are just as vulnerable to volatile economic transitions as you and I. They make their monetary policy through trial and error, and there have been mistakes.

The Fed, like Madonna, is constantly evolving. This establishment that aims to spread an aura of stability does not surprise us.

Vincent Reinhart, chief economist at Dreyfus-Mellon, said the Fed’s goals are relatively vague and subject to interpretation. He said definitions of these three goals – maximum employment, stable prices and moderate interest rates – are “unidentified flying objects”. Now it is clear that employment is strong and prices are high but with interest rates continuing to rise there could be more uncertainty and room for discursive monetary recommendations.

The Fed as we know it gradually moves interest rates up and down at pre-set meetings. They explain their decision-making as communicatively as possible and release their economic forecasts to give Americans an idea of what’s to come in the future.

This was not the case in 1980, when inflation soared to 14.6%, an all-time high.

Under the leadership of Paul Volcker, Fed officials raised and lowered interest rates sharply in unscheduled meetings without corresponding policy statements. The fed funds rate didn’t have a narrow target range like today – it regularly stretched 5 percentage points. It wasn’t until Alan Greenspan took over in the 1990s that the Fed began adjusting rates at FOMC meetings, and it wasn’t until the 2000s that the central bank began tightening and easing rates periodically.

Big changes also occurred in 2008 under the leadership of Ben Bernanke. That’s when the Federal Reserve responded to the Great Recession by enacting a previously unintelligible policy: Interest rates were cut by 100 basis points to nearly zero. They remained there until 2015.

Christopher Leonard, author of The Lords of Easy Money, an upcoming book on the history of the Fed, said these measures were “experimental and unprecedented.” They have crossed the limits.

Today, the Fed saw a “major shift towards transparency and trying to communicate policy clearly up front so as not to surprise the markets,” said Brian Rilling, head of global fixed income strategy at Wells Fargo Investment Institute. They are more transparent in their goals and policy setting. Moreover, Powell’s impact on monetary policy records has yet to be determined.

Reinhart said Powell appears to be loosely following the rules of the monetary game that Volcker laid out in the high inflation days of the 1980s, but each chair has to play to its own strengths. “Greenspan can dive deep into the data,” he said. “Volcker had personal authority over his understanding of markets and banking that was intimidating.” Powell seems interested in appearing to be outspoken; He added that he has shifted the focus and attention of the Federal Reserve to all Americans rather than just economists and investors.

But Rilling said that this central bank will face a new set of challenges when “the economy is not feeling well and inflation is still not returning to the target level”. Powell will have to decide whether the Fed will remain on track to raise interest rates while facing political and general pressures over the state of the macro economy. Perhaps this is the time when the Federal Reserve will enter the era of the “material girl.”

The Federal Open Market Committee will meet in Washington next week, and it is widely expected to announce another rate hike of 75 basis points.

Happy 13th birthday to minimum wage of $7.25

July 24 marks 13 years since the federal minimum wage was last raised to $7.25 an hour. It is also the longest period without an increase since the age of the federal minimum wage in 1938.

Although historically high inflation has eroded US salary strength and the headlines focus on a tight labor market, the $7.25 rate, which is $1,580 per year for full-time employment, remains healthy.

“Every day without a raise is another day when the minimum wage falls further behind the cost of living,” said Holly Sklar, CEO of Business for a Fair Minimum Wage.

The annual income of $15,080 is about four times less than the median US household budget of $61,334 in 2020, according to the most recent data available from the Bureau of Labor Economics. Inflation has risen by about 15% in the past two years.

The federal minimum wage is now at its lowest value since 1956, when the minimum wage was 75 cents, new analysis from the Economic Policy Institute finds.

The EPI found that a worker earning the minimum wage today takes home 27.4% less than it did in July 2009, and 40.2% less than it did in February 1968 when adjusted for inflation.

About 30 states and Washington, D.C. have a minimum wage that is higher than the federal standard. Five states have not adopted a state minimum wage: Alabama, Louisiana, Mississippi, South Carolina, and Tennessee. Two states, Georgia and Wyoming, have a minimum wage of less than $7.25 an hour. In all of these seven states, the federal minimum wage of $7.25 per hour applies.