For weeks, months, and even years on end, economic analysts around the world had wondered when the Federal Reserve was going to finally raise interest rates above zero percent. While the recovery from the Great Recession was painfully slow, an unemployment rate trending downward and a positive turnaround in economic growth were encouraging signs for those seeking the first rate hike since June of 2006. The good news finally came in December of 2015 with Fed Chair Janet Yellen’s announcement that the benchmark interest rate would be raised by 0.25 percentage points. Yet, lingering fears of a global economic downturn, both domestic and foreign, are prompting controversy over the Fed’s initial plan to continue raising interest rates throughout 2016.
Yellen has consistently been optimistic about the pace of the economy’s recovery, but is now offering conflicting testimonies to members of the Senate. On one hand, she has highlighted strong levels of consumer spending as well as the opportunity for growth stimulated by falling oil prices. Yellen also cited stronger wage growth as a reason to ignore pessimism about the effectiveness of an interest rate increase. However, on February 11 she noted in an exchange with Senator Chuck Schumer of New York that “wage growth is not a litmus test for changes in monetary policy.”
Members of Congress have questioned the effectiveness of the Fed to improve the economy’s productivity using monetary policy. Yellen’s position is that the Fed’s responsibility is to encourage growth via gradual interest rate hikes to capitalize upon an improving labor market. An economic downturn leads companies to reduce investment; rising interest rates are intended to be a symbol of a recovering economy. Senator Bob Corker of Tennessee, however, feels that it is critical for Congress to invest in key sectors (i.e. education) in order to improve the skills of the labor market and enhance productivity. In conversing with Yellen, Corker was steadfast in his claim that unusually slow growth in the productivity of the average worker is translating to slow rates of economic growth.
The Federal Reserve’s dual mandate is to control both unemployment and inflation: as job growth continues to be the backbone of the economy’s recovery, the increase in interest rates is Yellen’s primary method to keep a lid on inflation. No one can deny the importance of maintaining both figures at healthy levels, particularly while the United States economy is showing signs of a return to pre-recession success. But particular members of Congress like Schumer appear to have little interest in current inflation levels, and are more concerned about the impact of slow wage growth on the job market. It is true that despite strong job gains in recent months, the lack of wage growth for most employed Americans has hurt the economy’s potential. No matter if the Fed sticks with its agenda to gradually raise interest rates throughout 2016, or reverse course, any unexpected deviation from this plan will damage the Fed’s image of transparency and raise even more concerns among investors.