Federal Reserve policymakers on Wednesday will tell the world their latest plans for raising interest rates. The goal is to keep the economy on track. And right now, that is not an easy thing.
Members of the Federal Open Markets Committee track an array of sometimes conflicting data. Economists call this the Fed’s “dashboard.” So what are the dashboard’s instruments telling us about where the economy is headed next?
Capt. Yellen’s Dashboard
Fed Chair Janet Yellen’s job right now is kind of like Captain Kirk’s. Only instead of trying to safely steer the U.S.S. Enterprise past cloaked Klingon ships and other perils in the galaxy, Yellen needs to chart a course for the U.S. economy past Brexit, a potential banking crisis in China and other financial obstacles. That’s where the dashboard comes in.
Princeton economist Alan Blinder, a former Fed vice chairman, says one “hugely important” indicator on that dashboard is wages. “Wages are the backbone of consumer spending, which is in turn the backbone of the economy,” he says.
Over the past 30 years, wages for most Americans have been pretty stagnant when you adjust for inflation. So, in an economy driven by consumer spending that’s a long-term drag on the economy which Blinder says is “a very big problem that we need to address.”
In the shorter term though, over the past year, wages have been rising at least a bit faster than inflation. And many economists are relieved that wages are finally growing after the Great Recession.
Unemployment At 4.7 Percent
Another positive thing on the Fed’s dashboard, the official unemployment rate is now at 4.7 percent. Randall Kroszner is an economist with the University of Chicago and a former Fed governor. He says in some ways we’re better off than we were before the recession hit. “The number of jobs is higher than it was before the financial crisis,” he says. “GDP is higher than it was before the financial crisis.”
Still, the Labor Department’s latest monthly jobs report showed much weaker job gains than expected in May. And Kroszner says it’s definitely not all happy green lights blinking on Janet Yellen’s dashboard. “I think we have to worry about some asteroid fields that are out there,” he adds.
Frist, there’s the looming Brexit vote. That is, the potentially historic vote later this month in the UK where polls are suggesting that Great Britain could abandon Winston Churchill’s dream for a united Europe and decide to leave the EU. That could cause mayhem in global financial markets. Then there’s also economic trouble in China. Blinder says it’s clear that China’s economy is slowing and its banks are saddled with some bad loans. But he says it’s unclear how bad the situation in China actually is.
Also, there’s another problem that hasn’t made the headlines as much. “Another thing the Fed is scratching its head about now is productivity,” Blinder says. The short version here is that rising productivity is the engine that creates wealth for an economy. It allows us to do or make more with the same hour of labor from a U.S. worker. But that wealth creation engine has been stalling.
“Productivity growth has slowed to a crawl, to the lowest pace that we’ve seen almost in recorded history,” Blinder says. He and Kroszner both say some of the slowdown in productivity gains is likely due to U.S. companies not investing that much money in better equipment and technology. But they say nobody knows for sure exactly what’s happening with productivity.
On top of that, the Fed’s own custom-made labor market gauge called the Labor Market Conditions Index has been slumping in recent months.
We’re Not At Warp Speed, But We Escaped The Black Hole
All that might sound like a pretty long list of bad news. But Blinder says we shouldn’t worry too much. “You hear a lot in the media that our economy’s in terrible shape; it’s not.” He says if you look at GDP growth and job gains, “we look pretty good relative to almost every other country on the globe.”
Still, there are enough unfriendly objects flying toward the ship that most analysts expect the Fed to stay cautious, and not make any move to raise interest rates just yet.