Can The Federal Reserve Chair Take On Wall Street?
By Danish Khan
The recent speech by the new Chair of the Federal Reserve, Janet Yellen, was remarkable in multiple ways. First of all, Ms. Yellen acknowledged that working people are still suffering from the recent economic crisis and the recovery is at best incomplete. She also gave a precise number of the unemployment rate that can be sustained while maintaining a stable inflation rate, and in her estimates that number is around 5.2 percent to 5.6 percent. This number is simply too high, it should not be more than 4.0 percent. In simple terms, by accepting 5.2 percent to 5.6 percent, she is saying that if the number of unemployed people gets down to 8 million people out of the 155 million who are in the labor force, then the Federal Reserve will have achieved its ultimate target. I think the Madame Chair should be reminded that the primary task assigned to the Federal Reserve, as far back as the 1940’s, is to achieve full employment.Yellen surprised most of us when she stated the following: ‘’our (Federal Reserve) goal is to help Main Street, not Wall Street”. This statement is historic in itself. I would certainly not contest her good intentions to do her best to create employment opportunities for the millions of unemployed Americans, but apparently there are no immediate signs of a radical shift in the Federal Reserve policies. Time will tell whether Yellen lives up to her words, or instead ends up as a disappointment like President Obama. Furthermore, folks on Wall Street were not moved by her statement, the reason is obvious, they have their folks in Washington to protect their vested interests. But the real question is can the Federal Reserve alone create more employment through monetary policy? The answer is very simple: No. In the economic downturn, like the one in which are stuck, it is impossible to jump start the economy simply through monetary policy, i.e. by changing interest rates. In economic jargon it is called ‘liquidity trap’, meaning simply that the interest rate (federal funds interest rate) is so low that the Federal Reserve can’t lower it further to stimulate investment. In such a situation, monetary policy becomes very ineffective, therefore the government must intervene through an increase in Government spending.
The federal and state governments can invest in many projects, for example, public education, green energy, public transportation and infrastructure, to name a few. This is a very pragmatic and feasible solution and it will not only increase total output and employment in the economy, but it will also benefit the larger society and our environment for decades to come. But this brings up another question: how should the government fund these programs? Isn’t the budget deficit already too high? I would address the second question first, yes, the budget deficit is quite high, and therefore, the government should increase revenue by not only fixing the tax loopholes but also by increasing the tax rate on giant corporations. Apparently, there are no such plans on the ‘to-do’ list of the Obama administration. Can President Obama, in his second term with the newly appointed Janet Yellen, challenge the hegemony of Wall Street? My answer is no. For these policies to be realized, we need a government which can represent the interest of the larger society and not just the few at the top. History tells us that pro-Main Street changes are never enforced from the top; they are gained after long hard battles by folks at the grass-roots level. Thats where we need to win our democracy back.