CNBC’s Becky Quick uses her Fortune column to argue that the Federal Reserve should break the law.
The law says the Federal Reserve has to focus on two mandates: Keeping prices stable and keeping unemployment below 4 percent. That’s what Congress said in the Humphrey-Hawkins Full Employment Act.
Quick, bizarrely, thinks that the Fed focuses too much on the full-employment part. Actually, she knows that the Fed hasn’t done so for the last three decades—she says so (see Mike Konczal for more on the Fed and labor). She’s just worried that it will start worrying about it:
Think that’s an overreaction? Maybe. But Dan Thornton, a researcher at the St. Louis Fed, found a subtle but concerning trend analyzing policy statements from the Fed’s Open Market Committee, which sets monetary policy for the nation. He looked at statements all the way back to 1979, and found no reference to the objective of maximum employment anywhere — until Sept. 21, 2010. That happens to coincide with the Fed’s efforts to bolster its quantitative easing program, which critics assail as contrary to the Fed’s inflation-fighting mission.
The lesson we’re supposed to take from the fact that the Fed didn’t mention full employment for thirty-one years is that we need to beware the Fed focusing on full employment? Also, note the revealing slips here. It’s “concerning” to Quick that the Fed would even deign to mention full employment. Also, the Fed’s monetary mission is not “inflation-fighting.” It’s price stability. That means it has a deflation-fighting mission, too. And deflation has been far and away the bigger threat since the housing crash.
But the actions required to meet those two mandates can be contradictory, and some observers worry we are nearing one of those inflection points today. Their big concern is that by choosing to focus on the still unacceptably high unemployment level in America, the Fed will lose sight of the mandate to fight inflation — with disastrous results…
The worst-case scenario? Think back to the 1970s and early 1980s, when inflation skyrocketed, unemployment followed, and the Fed under chairman Paul Volcker had to boost the Federal funds rate as high as 20% to get the situation back under control. Imagine trying to borrow money to buy a house, send a child to college, or start a business with interest rates sitting at 20% or higher, and you begin to get the picture.
What a potential theoretical nightmare for the middle and upper classes! Meantime, in the real world—today—unemployment is at 8.8 percent. The U-6 underemployment rate, which captures all those who’ve given up even looking for work, is at 15.7 percent. Core inflation is at 1.1 percent (though overall inflation has gone up in the last couple of months—it’s unclear yet how much of that is noise from volatility), and alternative measures show us in deflation.
It’s worth noting that Fortune‘s and CNBC’s investor-class audience is comfortably ensconced in the full employment range, and was even at the height of the recession. They don’t have to worry about jobs and very few of them bump into much less know people living on $247 a week unemployment benefits in their trailer house. This audience is worried about any hint of inflation eating into their existing capital and future returns. Henry Luce didn’t call it “Fortune” for nothing.
Quick’s preaching to the choir then (and quoting Hoover Institution economist without disclosing that right-wing link). The bigger problem is it’s unclear that she’s aware she’s doing so.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.