THE FED GIVES GROWTH A CHANCE / THE NEW YORK TIMES EDITORIAL

The Fed Gives Growth a Chance

By THE EDITORIAL BOARD

.

The floor of the New York Stock Exchange on Thursday. Credit Andrew Burton/Getty Images       

 

 

The Federal Reserve did the right thing on Thursday when it opted not to begin raising interest rates.

 

By holding steady, the Fed is acknowledging, correctly, that the economy shows no signs of overheating. Price inflation, for example, has been below the Fed’s 2 percent target for years and shows no signs of accelerating.

 

The Fed also acknowledged the dampening effect global economic weakness and financial-market volatility may have on the American economy. In the past, the Fed played down those dangers, assuming they would be transitory or bearable. In the statement released after its policy-making committee meeting, it shifted, saying international and financial conditions could slow the domestic economy, making an interest-rate increase to restrain the economy unnecessary, at least for now.

 

In one important respect, however, the Fed appears to be doing the right thing for the wrong reasons.

 

Judging from its statement and its economic projections, the Fed believes that the labor market has largely returned to health. That suggests it will be poised to raise rates as soon as the global headwinds abate.

 

But the labor market is not healthy, and until it is, rate increases would be premature. Unemployment, at 5.1 percent in August, is still higher than it was before the recession. The share of part-time workers who need full-time jobs is still elevated, while the share of working-age adults with jobs is still well below its prerecession level. Most telling, broad wage growth — the clearest sign of labor market health — has been virtually nil during the six-year-old recovery.

 

The Fed is supposed to conduct policy in a way that fosters full employment, meaning rates should not be raised until jobs and wages are on a robust growth trajectory. But it seems more concerned with its mandate to fight inflation. That focus would be questionable even if there were nascent signs of inflation; in the absence of any signs, it is indefensible. In fact, inflation has been so low for so long now, it could run somewhat above the Fed’s target for an extended period without being disruptive and, in the process, allow wages to grow in line with productivity.

 

And yet, inexplicably, a majority of Fed officials expect to begin raising rates later this year.

 

Congress long ago punted on its responsibility to use fiscal policy to help the economy. That has put an undue burden on the Fed, in effect making the Fed’s near-zero interest rate the only source of steady policy support for a struggling economy.

 

The Fed should not have been put in that position, but that is the position it is in. It should not compound the problem of inadequate congressional action by removing its support before the labor market has truly recovered.