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Professor Robin Hahnel of E3 Network says Yellen is acting in the public interest and does not want to derail slow and tepid recovery

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SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore. The Federal Reserve chair, Janet Yellen, on Wednesday once again sent out signals that the Fed is considering raising interest rates, but for the moment she would keep it hovering at the low levels of below 0.5 percent, where it has been for the last six years. Let’s have a look at what she had to say. ~~~ YELLEN: Well, it’s still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting. Such an increase could be warranted at any later meeting depending on how the economy evolved. Slacken in the labor market continues to diminish. Meanwhile, the labor force participation rate, the percentage of working-age Americans either working or seeking work, is lower than most estimates of its trend. And wage growth remains sluggish, suggesting that some cyclical weakness persists. ~~~ PERIES: Now to decipher all of that Fed talk I’m joined by Robin Hahnel. He is professor emeritus at the American University and research affiliate of Portland State University and codirector of the economics for equity and the environment, the E3 network. Thank you so much for joining us, Robin. ROBIN HAHNEL, PROFESSOR EMERITUS, ECONOMICS, AMERICAN UNIVERSITY: Very good to be with you today. PERIES: So, Robin, tell us what the key strokes were in the announcement in plain English, if you may. HAHNEL: Yes. Translating from Fed speak, Janet Yellen is doing everything within her power to slow down the pressure that she’s under to start raising interest rates here in the United States. We actually have a news network that today sort of asked the question, is Janet Yellen too socialist? And I think that’s actually a good way for people to sort of understand what’s going on. As much as any chairperson of the Federal Reserve Bank of the United States can be, she is actually trying the best she can to act in the interests of the general public, which is quite unusual. And so she is trying to delay as long as possible raising interest rates in the United States, mostly because she doesn’t want to derail the sort of slow and tepid recovery that’s going on and she understands that raising interest rates prematurely and too rapidly would have the significant danger that it would slow our recovery. And she’s pointing out that there is no sign that there is inflation on the horizon, that the only reason the Fed should have to be raising interest rates really is if there is inflationary pressure and if there is a danger of inflation. And the people trying to convince the Fed to raise interest rates keeps claiming that we need to do this to prevent inflation, but they have no evidence on that side. PERIES: Robin, you were saying earlier that she’s under pressure to raise interest rates. Under pressure from whom? And how does raising interest rates actually address inflation? HAHNEL: Well, she’s under pressure from the Republican Party. They would probably criticize her no matter what she did at this point, since she was appointed by Obama. And she’s under pressure from people who are not really interested in having the unemployment rate go down any further and who certainly are not interested in having wage rates go up. And that’s what’s not happened. There’s been improvement in unemployment, but there’s still no sign that wage rates are actually improving and benefiting from an improving labor market. So, clearly employers don’t want to wages go up and they’d like to see the Fed start to tightening on interest rates. Now, the way it works is that if the interest rates are higher, then businesses will borrow less and invest less. You will basically take some steam out of business investment and hiring. HAHNEL: The interest rates that the Fed sets at lower than 0.5 percent, hovering around there, is really the interest rates that it lends to other banks or offers to other banks. This is not the interest rate that’s transferred to us when we, as a small business owner, wants to go out and borrow some money. HAHNEL: That is correct. The Fed controls the interest rate at which they lend the banks. But if that interest rate goes up, then the interest rate the banks will be charging consumer customers and business customers and borrowers will also go up. So it is true that the Fed doesn’t set the interest rate that consumers pay, the Fed doesn’t set the interest rate, the prime rate that businesses pay when they borrow from banks. Nonetheless, when the Fed is making it cheaper for the banks to borrow, then that makes it cheaper for–then the banks will also be lending at lower interest rates. Now, what they’re talking about is the Fed’s going to raise the interest rates that they charge the banks, and then predictably the banks will be raising the interest rates that they charge others. The other thing that comes to play here that’s important is that when interest rates in the United States rise, then that will have an effect that will strengthen the value of the dollar as a currency against other currencies. And that has a big effect on lots of actors in the global economy, and it particularly would have an effect on the ability of U.S. businesses to export products. So when you raise interest rates, you dampen business investment, and that slows down recovery. And when you raise interest rates and that increases the value of the dollar and reduces exports, well, then fewer exports means fewer jobs creating those goods and producing those goods for export. So that’s the concern that she has. She doesn’t want to dampen exports and dampen investment while the economy in the U.S. is still in a very tepid recovery and in particular wages have yet to really see any benefit. PERIES: And you agree with that move? HAHNEL: Yes. I think–yes. The fact that the powers that be are criticizing her as being maybe you’re being too much of a socialist as the chair of the Fed is an excellent signal to the rest of us that she’s actually doing what we would like her to do that was best for most of us. PERIES: Apparently the market is now dealing with several other investment bubbles that are going on. Can you tell us more about that? And how does that impact the decisions she made today? HAHNEL: I mean, the truth of the matter is that what the Federal Reserve Bank the United States does, I mean, has tremendous impacts all of the world. And one of the things that I think that chairwoman Yellen is concerned about is the fact that the low interest rates for the long, long period of time that have been necessary because there was very little fiscal stimulus in the United States–we haven’t had fiscal stimulus since 2009, and there’s not any sign that we’re going to have any fiscal stimulus with Republicans controlling Congress. So what’s happened in that context is that the Federal Reserve, first under Bernanke and now under Yellen, they were the ones that had to do something to pull us out of the Great Recession, and they did that by basically just flooding the banks with cheap money. Now, one of the problems with that is–and I think that chairwoman Yellen is aware of this–that can also create bubbles. It can create a stock market bubble. It can create housing bubble. And I think my own guess would be that besides the fact that she has to get other people on the board to vote with her, to delay the raise in the interest rates–I mean, she can’t just do this by herself. She sort of–it’s a delicate political game, where there’s votes that she has to be sure that she can get. Besides just trying to delay as long as she can raising of interest rates, I think the one thing that would make her want to raise interest rates is if she sees a housing bubble that’s going to get out of control again. And having all that cheap money out there in the housing market I think has started to create–there is some–whereas there’s no indication that we’re having inflation yet, I think you can begin to see the signs of another asset bubble. And that would concern Yellen, and it should concern all of us. PERIES: And this is largely in the housing market or elsewhere? HAHNEL: Well, it could be in the stock market. One of the amusing things of today’s story was that she’s being accused of being a socialist, and yet the response from–the stock market response was to say, oh, we’re so glad you’re not raising interest rates yet, so stock prices went up. So maybe socialism is good for the stock market. Who knows? It’s not really, but it’s rather interesting. The other place that rising interest rates and a rising value of the dollar has a big effect–and the chairwoman of the IMF was talking about this recently–that in Third World countries, there’s been a lot of borrowing–private borrowing, not government borrowing, in Third World economies during this past year, two, three, four years. And that private borrowing is in dollars sometimes. And the interest rate has been very low. Now, if interest rates go up and if the dollar goes up in value and the people who have to pay off those loans get their income in foreign currencies, this could create a sort of wave of bankruptcies in Third World economies. And the IMF, as it should be, is quite concerned with that. So that’s another implication of a change in Fed policy that might trigger a situation in important parts of the global economy that would be very unfortunate. PERIES: Robin, thank you so much for joining us today. HAHNEL: It’s very good to be with you. PERIES: And thank you for joining us on The Real News Network.


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Robin Hahnel is Professor Emeritus in the Economics Department at American University and a Research Associate at Portland State University. He is author of Green Economics: Confronting the Ecological Crisis (2011) as well as numerous academic journal articles on climate change policy. He is best known as co-creator of the alternative to capitalism known as "participatory economics." His most recent books are Economic Justice and Democracy (2005), Of the People, By the People: The Case for a Participatory Economy (2012), The ABCs of Political Economy (2014), and Alternatives to Capitalism: Proposals for a Democratic Economy (2014) with Erik Olin Wright.