The NYT Goes Looney Tunes on the Fed

The New York Times had a bizarre piece by Karen Petrou attacking the Fed for its low interest rate policy. The column title tells the story, “Only the Rich Could Love This Economic Recovery.”

This is bizarre, because people who read the news section of the NYT would know that workers have more bargaining power in the economy right now than at any point since at least the late 1990s. The quit rate hit a record level in April, and even with a drop in May, it is still at a 20-year peak. Workers, especially at the bottom end of the wage ladder, are seeing substantial wage gains.

The pandemic payments have also allowed many families to pay down debt, leaving their finances in much better shape than before the recession. Also, the expanded subsidies in the health care exchanges have allowed many people to get health care insurance who could not previously afford it. The NYT had a very good column earlier this month by Julia Coronado laying out many of the measures showing the improved economic plight of low and middle class families.

It’s very hard to understand Petrou’s case. It’s true that low interest rates tend to raise asset prices, and since the rich own a hugely disproportionate share of assets, this means that they will get richer if rates are low, but it is hard to see how low and middle class people would benefit from higher interest rates.

Petrou tells readers in a section headlined “What Is the Fed For”:

“The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create.

“The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

“Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

“The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.”

The first claim basically turns reality on its head. There is no plausible story whereby raising interest rates will lead businesses to increase spending on new plants and products.

How could that possibly work? Ford sees that its borrowing costs have risen by two percentage points so it then says, “let’s build new factories and start new car lines.” This is absurd on its face. It is possible to exaggerate the impact of interest rates on investment, but there is no doubt that lower rates, not higher rates, lead to more investment.

Low rates also make it easier for people to buy homes. We have seen a huge building book since the early days of the pandemic when the Fed pushed interest rates to new lows. Millions of homeowners also took advantage of low interest rates to refinance their homes, saving thousands of dollars a year in mortgage payments. State and local governments were also able to take advantage of low interest rates to reduce their borrowing costs, freeing up money for other needs.

The second complaint, that low interest rates somehow harm ordinary people’s finances is also 180 degrees at odds with reality. And the third complaint is simply that Petrou would like higher interest rates.

In short, this tirade against the Fed’s low interest rate policy and the dismal state of the economy makes absolutely zero sense. Given the horrors of the pandemic, the economy is remarkably good shape, and the Fed’s interest rate policy has been a big factor in sustaining the economy through the recession and now boosting its recovery.

This first appeared on Dean Baker’s Beat the Press blog.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.