Zero interest rate policy may be bad for Wall Street but it's good for workers

It took them a day to absorb the news but by Friday investors across the world had decided that the Federal Reserve’s decision

interest rates was bad news. Stock markets dropped as investors absorbed the Fed’s cautious tone about the world economy. But while Wall Street may not be happy, this weekend most workers should be breathing a sigh of relief.

For weeks we have been hearing from trigger happy economists and policy types, including some at the Federal Reserve, arguing that the Fed should start raising rates for the first time since the recession. Fortunately, for now at least it seems Fed chair Janet Yellen has chosen not to join this chorus. For at least another six weeks, the Fed will leave its zero interest rate policy in place.

The drive to raise interest rates is difficult to understand from any broad view of the state of the economy. Most immediately, it is not possible to find any basis for concern about inflation getting out of control. The inflation index upon which the Fed focuses has been running below its 2% target for six years. Its most recent movement has been flat or even downward as falling commodity and import prices have put downward pressure on the overall inflation rate.

Furthermore, it is important to remember that the Fed’s policy is that 2% inflation is an average, not a ceiling. This means that we can run an inflation rate of 3% for the next four years and still be in line with the Fed’s inflation target.

If recent price movements provide little rationale for raising interest rates, the current state of the labor market gives plenty of reason to keep interest rates low. It’s true that the 5.1% unemployment rate is not especially high, but this measure does not fit with most of the other evidence about the state of the labor market.

The employment rate, the percentage of the population who have jobs, is still more than three percentage points below its pre-recession level. This is true even if we focus exclusively on prime age (ages 25-54) workers. Other measures of labor market slack, like percentage of people involuntarily working part-time and the quit rate are still near recession levels.

Most importantly, there is no evidence that wage growth is accelerating. The rate of hourly wage growth remains near 2%, the same pace as the last four years. If workers are to share in the gains of productivity growth we should be seeing annual wage growth of at least one percentage point more than the rate of inflation. In fact, since workers should be getting back some of their losses over the last decade, we should expect to see wage growth outpace productivity growth for at least a short period of time.

While the case against a rate hike is strong, it was hardly a foregone conclusion that the Fed would not raise rates. Many of the establishment economists and economic policy types (you know, the people who couldn’t see an $8tn housing bubble) were arguing that the Fed should raise rates. They really didn’t have much of a story on the need to curb inflation, nor could they plausible argue the economy is growing too fast.

In the absence of the normal justifications for rate hikes they were left to arguing that a zero interest rate is not normal. Of course, an economy in which millions of workers can’t find jobs, millions more can’t get full-time jobs, and wages are stagnant, is not normal either. That is the reason we need to keep interest rates low.

The rate hikers’ return to normal argument is like arguing that putting away our umbrellas will make it stop raining. It simply is not serious.

But policy has often been moved by unserious arguments in the past. A big difference this time was the public mobilization against an interest rate hike. At the center of this movement is the Fed Up campaign being led by the Center for Popular Democracy. This campaign has pulled together unions, community activists, religious organizations, and ordinary workers across the country.

They have visited with members of the Fed’s board of governors, including Yellen, as well as many of the Fed’s district bank presidents. The point is to remind the Fed’s leaders that interest rate hikes have real consequences for real people. Higher rates mean fewer jobs. They also mean lower wages and less bargaining power for those who have jobs.

This sort of campaign is important for securing a balance in Fed policy. The financial industry can be counted on to pressure the Fed to raise rates to prevent inflation. After all, the Wall Street bankers rarely lose their jobs in a downturn. It is essential that the Fed feel comparable pressure on behalf of ordinary workers. For now it seems they took the workers’ views seriously.