Pressure builds on the master of the financial universe

Even the idea of higher US interest rates has already spooked world markets. Now, as the Federal Reserve prepares to meet next week, bank boss Janet Yellen

iberals helped install Janet Yellen as the first Democrat to lead the Federal Reserve in nearly three decades. But now, halfway through her tenure, they are turning into some of the US central bank’s sharpest critics.

Yellen won the backing of liberals during her nomination three years ago to one of the most powerful positions in the global economy. They admired her early warnings of the financial crisis and were heartened by her staunch support of central- bank efforts to reduce unemployment.

But now, as the Fed contemplates raising interest rates next Thursday ( NZ time), there is concern among liberal policy experts and economists, who worry about upsetting the fragile US recovery.

Democratic lawmakers have pushed back against the Fed’s plans to raise rates even though unemployment among people of colour remains high and wage growth is still relatively weak.

In a letter to Yellen, more than 100 members of Congress and nearly a dozen senators questioned why there were so many bankers — and so few women and racial minorities — in the Fed’s top ranks.

As Yellen and her colleagues gathered at Jackson Hole for their annual economic conference last month in the shadow of the majestic Grand Tetons, they were greeted by a towering banner reading “Full Employment 4 Black + Brown” and demonstrators chanting, “Whose Fed? The people’s Fed!”

“There is still a lot of hope that Janet Yellen is more ally than adversary,” said Josh Bivens, research and policy director at the Economic Policy Institute, a left- leaning think tank that was involved in the protest. “But we also realise that the Fed has a lot of crosscutting political pressures.”

In a speech last month, Yellen suggested the Fed was moving closer to raising rates again, despite liberal objections. She argued that the job market was improving, even though broader economic growth has been disappointing. And she said the central bank is nearing its goals of maximising employment and keeping prices stable. “I believe the case for an increase in the federal funds rate has strengthened in recent months,” Yellen said.

That, combined with thinking aloud from other Fed board members during the past 10 days triggered the “Bigger than Brexit” sell- off on Wall Street.

The Fed fiercely defends its decisions from political interference. Setting interest rates is the key lever the central bank uses to steer the economy: raising its benchmark rate generally encourages savings rather than spending, slowing down an overheating economy. Low rates make borrowing money more attractive, boosting growth.

During the long recovery from the Great Recession, the central bank kept its benchmark interest rate at virtually zero and pumped trillions of dollars into the economy in the hope of fostering faster growth. Republicans lambasted the effort as creating potentially dangerous imbalances in the financial markets. Democrats backed the moves as essential to ensuring the nation did not slip back into recession.

But things have changed since late last year, when the Fed, under Yellen’s leadership, raised rates for the first time in nearly a decade. Liberal economists — including some within the central bank — worried that the move was premature. Democrats who had hoped Yellen would keep the easy money flowing were worried.

So activists at the Centre for Popular Democracy, a coalition of liberal groups, organised workers to protest in Washington and at the central bank’s regional branches across the country, then contacted lawmakers and liberal economists to amplify their message.

Seeded with money from Silicon Valley, the two- year- old organisation has turned the effort, known as Fed Up, into a powerful vehicle for the liberal critique of the central bank. inequality also fell outside the Fed’s traditional comfort zone.

“The new Federal Reserve Chair Janet Yellen is different. She’s a progressive who cares about jobs,” touts a slide from a Fed Up video that superimposes Yellen’s face on Rosie the Riveter.

Yellen still has broad personal support among Democrats, though activists say they intend to hold her — and the rest of the central bank — accountable for sustaining the recovery. Even the most vocal critics are careful to level their attacks at the institution and not directly at Yellen.

In a statement, Merkley said Yellen was doing “an excellent job steering the Federal Reserve through uncertain times.” Democrats also acknowledge that Yellen must build consensus among the 16 central- bank officials who are eligible to vote on the direction of interest rates.

The pressure comes as Yellen faces another crossroads. The Fed is contemplating raising rates again, amid resilience in the job market and fading fears of recession. Some analysts say the central bank could hike rates again as soon as next week — and progressives are urging the Fed to rethink.

At a packed meeting inside a stuffy conference room at Jackson Hole, 10 Nobel Prize- winning economist failing to provide the opportunity for candidate. Liberal Democrats top Fed officials sat down with Joseph Stiglitz, one of Yellen’s friends the skills needed for the economy of opposed Summers’ role in activists to talk about the economy. and boosters, joined the group’s the future,” said Democratic Senator deregulating large banks during the The central bank has already demonstration at Jackson Hole last Jeff Merkley. “But I don’t hear the Fed 1990s and his controversial demonstrated caution in raising year. talking about that.” comments about women in science rates, they argued. Moving gradually

Fed Up is also taking aim at the lack The Fed has come under frequent that contributed to his resignation as now could also prevent the need to of diversity in the top rungs of the fire from both sides of the aisle since president of Harvard University. hike rates abruptly in the future. central bank and is pushing to remove its founding in 1913. Most recently, Yellen, on the other hand, is the “Everybody on this panel is painfully bankers from the Fed’s boards of Republicans and Democrats have first woman to lead the Fed in its aware of what the costs of the last directors — a proposal backed by excoriated it for what was seen as lax 100- year history. She was among the recession were and wants to avoid a Democratic presidential nominee regulation of banks before the 2008 first officials at the central bank to future recession,” said Eric Hillary Clinton. financial crisis and its subsequent warn that a bust in the housing Rosengren, president of the Boston

Activists have urged the central Fed.bailout of those same institutions. market could cascade through the bank not to raise rates until the T Lawmakers have repeatedly called for rest of the economy. And she had he crowd appeared unemployment rate falls to 4 per cent greater transparency at what has devoted her academic career to unconvinced. “The economy has for all races. historically been a secretive central studying how the job market works. recovered for much of white America.

During Yellen’s appearances on bank. Yellen’s first major speech as Fed But for black and Latino workers, it Capitol Hill, Fed Up members have But the new unrest among liberals leader did not disappoint. After hasn’t,” said Fed Up member Rod donned green shirts with the slogan is striking because it was progressive touring job training programmes in Adams, a neighbourhood organiser “Whose Recovery?” and filled the lawmakers who helped clear the way Chicago, she told the personal stories from Minneapolis. “If you decide that seats behind her. Democratic for Yellen’s nomination to lead the of workers who struggled to find we are at maximum employment now lawmakers have echoed their central bank. Merkley, in particular, employment and earn a good wage — and you intentionally slow down the dissatisfaction from the dais. was instrumental in scuttling a rival an unorthodox move for an economy, you will be leaving us

“The Fed should be using its bid for the job from former treasury institution that typically deals in behind, pulling up the ladder after economic expertise to highlight the secretary Lawrence Summers, who abstract statistics. Another speech on you’ve climbed it.” long- term devastating impacts of was President Obama’s favoured the economic consequences of

The economy has recovered for much of white America. But for black and Latino workers, it hasn’t. Fed Up member Rod Adams