Report: Fed raised rates too soon at cost of up to 1M jobs

Hole, Wyo., on Aug. 24. ers and borrowers and pre

Translation into English, vent a deeper collapse. please? Try this: “Members of “The Fed deserves praise The Federal Reserve, in the (Fed Open Market Comfor preventing a far worse its rush to prevent prices mittee, which sets interest outcome” — but “made a misand wages from rising too rates), including me, now take” when it began boostfast, underestimated how believe that the neutral real ing rates in December 2015, fast American employers interest rate (which doesn’t after years of keeping the were hiring workers, and grow or shrink the economy) price of money close to hisboosted interest rates before and the natural rate of unem- toric lows, according to the the economy was ready — ployment (where the only paper. costing U.S. workers up to a people not working don’t (This is not Moody’s official million jobs since 2015, econ- want to) are lower than we corporate position, Ozimek, omists Adam Ozimek and had realized,” wrote Neel who is based at Moody’s Michael Ferlez concluded in a Kashkari, who heads the Economy.com unit in West paper for Moody’s Analytics’ Fed’s Minneapolis branch Chester, told me. His boss, Regional Financial Review. bank. Mark Zandi, who often tes

“The Fed’s incorrect The roots of the Fed’s contifies in Congress and was beliefs” have cut growth fusion reach back at least to considered for a top regand hiring by a “substan- the Great Recession. The ulatory job in the Obama tial” margin, they added — Fed moved quickly, as Lehadministration, “was argu- noting that the central bank’s man Bros., Bear Stearns Co., ing with me about this” just own leaders, talking in cen- and other investment banks last week. But outfits that tral-banker code, have admit- bloated by rotten mortgage employ economists tend ted the Fed was wrong when debt collapsed, business to let them follow the data it started raising interest rates orders stalled, and layoffs where it takes them.) in late 2015. rose until one in nine AmerYou can track how the Fed

For example: “Policy was ican workers was unembumbled a key policy-makless accommodative than ployed. It pushed tempo- ing and interest-rate-setting thought at the beginning of rary bailouts for commer- benchmark, the “unemploynormalization,” acknowl- cial banks, cut interest rates ment rate gap,” which gauges edged Jerome Powell, Presito zero, and bought piles of the difference between how dent Trump’s Fed chairman, mortgage bonds and other many people are working at a symposium in Jackson financial assets to calm lend- and how many jobs the econ- omy can sustain without it would stay around 4.9 per- inflating wages and other cent. The drop caught the prices. The Fed posts a quar- Fed by surprise, causing it terly Summary of Economic to cut the “longtime” projec- Projections, which is suption, so far, to 4.45 percent. posed to show where unem- That’s a “significant error,” ployment is headed over Ozimek and Ferlez noted the next few years, absent in the paper, pointing out unusual shocks, and with that Powell has since said a steady Fed hand guiding he expects unemployment “appropriate monetary pol- may even continue falling icy.” below today’s lower rates.

Ozimek and Ferlez checked “Based on what it knows the Projections against what now” and given the Fed’s actually happened, and congressional mandates to found that in 2015, when keep prices flat and unem- the Fed began boosting rates ployment low, the Moody’s under Obama’s Fed chair, economists concluded, “the Janet Yellen, actual unem- Fed should not have started ployment stood at 5 percent; raising rates” for at least two it has since dropped to 3.9 years after it did so. percent. The Fed projected Higher i nterest rates translate to less borrowing, more bad loans, and slower growth. Factoring in actual inflation (which has remained low) as well as higher employment than the Fed expected, Ozimek and Ferlez pump jobs, interest rate, and price data through Moody’s macroeconomic model and estimate the premature rate hikes have cut U.S. annual growth by 0.4 percent to 0.8 percent as of the second quarter. In other words, the hikes have shaved one-eighth to one-fourth of a percentage point off the recent economic expansion — costing between 500,000 and a million jobs.