It may sound like a Zen koan, but the longer the Federal Reserve declines to take action in coming months, the more its inaction will seem like action. To put the paradox another way, the Fed’s failure to raise rates makes it even more of an election cycle factor in U.S. domestic politics, keeping the central bank in the spotlight to an excessive and unconstructive degree, like a low-level fever that doesn’t keep you in bed but casts a general pall.
It has now been more than seven years since the Fed last raised interest rates, and the rationale for last week’s most recent decision came as something of a surprise to market players: In addition to seeing little evidence of inflation, the Fed in its statement also expressed concern about global volatility and continued instability.
That was not taken well by some. Said Rick Santelli of CNBC, he of Tea Party fame, the Fed has now expanded its mandate to become “the U.N. central bank.” Others wondered whether, in addition to its mandate to assure price stability and full employment, the Fed was now unofficially adding a third goal: maintaining global financial stability. And that, you can be sure, will be sure fodder for Republicans and not a few Democrats who already believe that the Fed is too powerful, too unaccountable and too focused on the needs of the financial system at the expense of average workers.
There are, of course, legitimate questions about whether the Fed and other central banks are erring in their multiyear course of easy money. The European Central Bank is now in the midst of its own policy of “quantitative easing.” While the European Union has ceased its economic free-fall, that is about the most that can be said of its current economic recovery. Japan has been in the midst of more than two decades of easy money and near-zero interest rates since the 1990s. It too has exhibited low growth. The United States has recovered from the worst of the global financial crisis of 2008-09, especially in terms of a low unemployment close to 5 percent and growth above 2 percent, but years of zero interest rates have hardly fueled a boom in anything other than some speculative stocks, urban real estate in select cities, and high-end art.
Because the Fed has given no clear sense of when it might actually start to raise rates, it thus has solidified its profile as an eternal Hamlet for months to come. The question "Will they or won't they?" has become tedious and borderline-obsessive. There was some hope that this conversation would come to an end; now it will simply go on, absent some major event that makes it irrelevant.
Lost in the market noise and the political spin, however, is precisely the point underscored by the Fed itself and Janet Yellen: It is a major actor on a complicated global stage that has a large cast of characters—one of whom, Chinese President Xi Jinping, is visiting Washington this week. Its mandate, based on legislation in 1913 and updated in the 1970s, speaks to a world that no longer exists. A mature governing legislature would, of course, update and refine that mandate to reflect changed global realities. But the American Congress today is incapable of that type of thinking, as least as a body; individual members are certainly able to recognize the ways in which an entire swath of laws and institutions are out of date. But good luck doing something about it.
Instead, the appointed officials of the Fed are left to muddle through and to try to reconcile a series of demands along with a political minefield. Markets want certainty, and politicians want transparency, and everyone wants more growth. The problem is that certainty is a myth; transparency is a code word for forcing a partisan agenda; and growth for mature economies facing technological disruption and labor competition globally is beyond the control of any one institution.
None of those realities plays well in an election cycle. The very messiness of a modern mature economy in flux may be why none of the Republicans during the last debate mentioned it much. There is no good sound bite. Meanwhile, both Bernie Sanders and Hillary Clinton have been advancing detailed economic plans, ranging from an end to short-termism on Wall Street to an attack on economic inequality. Worthy those may be, but they engage on a cerebral level rather than on the visceral, and hence get short shrift in our national discussion.
By not acting, the Fed feeds into an old red-meat political narrative of indifferent or downright malicious financial elites of the East Coast establishment making policies secretly and opaquely to benefit the interests of a privileged few at the expense of real hard-working Americans who suffer the consequences. Such a story was spun more than a century ago by the populist William Jennings Bryan and his doomed presidential campaign thundering that Americans were being crucified on a “cross of gold.” The Fed today isn’t responsible for that history, but surely it could be less tone-deaf to it.
Fed blame, however, is no more a winning proposition now than it was then. We can excoriate (or credit) the Fed all we want. Its inaction makes it easier for various actors casting about for sound bites and solutions to use the Fed as Exhibit A for why things aren’t better. Would that it were so simple.