Monetary
It was not a big surprise that no action on interest rates was taken at the FOMC June meeting. The post-meeting statement from policy makers suggested no significant changes in the Fed’s plans. But several key points were revealed in the June “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents.” GDP growth projections were lowered, the assessments of the timing of an initial rate increase stayed unchanged, and the expected future path of interest rates was revised down once again.
In light of the poor U.S. economic performance earlier in the year, the June projections of real GDP growth for 2015 were lowered to 1.8 – 2 percent, compared with 2.3 – 2.7 percent in the March projections. Consistent with this more pessimistic view, most FOMC members anticipate a slower pace of interest rate increases than previously anticipated, even if their view on the timing of the liftoff has not changed.
A majority of FOMC participants, 15 out of 17, judged that the first rate increase would occur this year, while two thought it appropriate to wait until 2016. Considering this, we expect that the Fed will begin raising short-term rates later this year, barring unforeseen developments.
In addition, for the second consecutive time in 2015, the FOMC revised down its projected pace of the interest rate increases (see Chart 4). According to Fed Chair Janet Yellen, this slowing is a more important indication of the central bank’s policy stance than the timing of the liftoff.
There appears to be a consensus among FOMC officials that policy firming should occur slowly, and recent data seem to have convinced them that rate increases should be more gradual than previously believed. Regardless of when the liftoff comes, we can expect a moderate pace of increases and low interest rates in coming years.
labor market weakness affects attitudes on a range of policies
The Great Recession ended six years ago in June 2009, but many middle-income Americans feel that the economy has not yet fully recovered. Data, especially describing the labor market, largely support this view. The labor market is not doing as well in the current expansion as it did at the six-year mark in the two earlier recoveries (in 2007 and 1997).
The nation’s jobless rate, at 5.3 percent, remains higher than the level reached at this point in previous recoveries (4.7 – 5.2 percent). A broader measure of labor underutilization, which counts not only the unemployed, but also those who gave up looking for a job and those only able to find part-time work, paints an even gloomier picture. Almost 11 percent of the labor force is in this category, compared with 8.4 – 9 percent at this stage of the previous recoveries.
Incomes are growing more slowly as well. During the past year, the weekly earnings of production and non-supervisory workers grew about 1.6 percent, much below the 4 percent-and-higher growth seen in the earlier recoveries. Aggregate wages and salaries show a similar pattern. Over the past year this measure rose about 4.8 percent, but in past expansions it grew at a 5.5 – 7 percent rate.
The data bear out the concerns of middle-income Americans that the labor market situation has not improved sufficiently. These concerns color attitudes toward a number of government policies.
The obvious recent example is the difficulty President Barack Obama initially faced in getting Congress to grant him fast-track negotiating authority on the Trans Pacific Partnership trade agreement. Free-trade agreements invariably create anxiety among groups likely to be negatively affected by them, of which labor unions are a prime example. This anxiety resonates more broadly when the state of the labor market is seen as precarious, as it is now. In a robust economy, union concerns meet with less sympathy. This was the case in the late 1990s, when the labor market was much more robust and several far-reaching free-trade measures were adopted.
Other examples include debates about immigration and the minimum wage, both of which are more heated today than in the past. People’s view of the labor market and what its condition may portend for them often affects where they come down on these issues, but in ways that may not be immediately obvious.
The subdued rate of job and income growth does not necessarily mean that people uniformly favor an increase in the minimum wage, for instance. Some (even those paid above the minimum rate) may feel that raising the federal wage floor would give businesses yet another incentive to cut jobs, thus endangering their employment.
The immigration debate today extends not only to undocumented immigrants, but also to authorized foreign workers, such as those here on H1-B visas. These issues elicit more attention today than they did in the 1990s, when millions of undocumented immigrants were arriving in the U.S. and H1-B visa quotas were routinely extended (from the standard limit of 60,000 annually up to 200,000 a year and more). But when unemployment was below 5 percent, most Americans were unconcerned.
As long as employment and income remain uncertain for large numbers of Americans, political attitudes are likely to favor protectionist tendencies in trade, immigration, and other issues that can affect the labor market. This will affect the adoption and implementation of policies for years to come.