Among the Fed’s policy makers, the majority argue that the wage pressures that Mr. Fisher and a few others see as imminent are still well down the road. Dealing with a nonexistent problem by raising interest rates now, they say, could push a still growing economy into outright recession.
But those holding this majority view, among them Ben S. Bernanke, the Fed chairman, invariably add a significant caveat: They could be wrong. Wage pressures could somehow erupt, catching them off guard. Given that risk, they say, they would prefer to raise interest rates from their present very low level rather than do so too late.
They refer to this precautionary mind set with another bit of jargon, “anchoring inflationary expectations,” which means discouraging workers and employers from engaging in a wage-price spiral by persuading them that inflation will not shoot up. In a bit of circular reasoning, they argue that the inflation rate has not risen significantly since the 1970s because workers and employers were convinced the policy makers simply would not let it happen. So they refrain from fomenting wage-price spirals.
Mr. Volcker established the practice of pre-emptive rate increases to “anchor inflationary expectations,” and Alan Greenspan, his successor as Fed chairman, embraced it. So has Mr. Bernanke.
For its part, the public expects inflation to subside within the next five years, despite the current oil and food price shocks, according to the Reuters/University of Michigan Surveys of Consumers, a barometer closely watched at the Fed.
Partly for this reason and partly because the housing and financial crises are still unresolved, many Wall Street economists predict that the Fed will keep interest rates at their present low level until next year.
But that does not prevent Mr. Bernanke from sounding at times like his putative opponent, Mr. Fisher, who pushes for a rate increase now to bat down wages and inflation, even at the risk of also batting down the economy.
Reiterating a mantra that the Fed’s policy makers seem reluctant to abandon, Mr. Bernanke told Congress on July 15: “We must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage-and-price setting process.”
No one at the Fed seems more aware of the economy’s fragility than Mr. Bernanke. Trying to save the day, he brought down the federal funds rate to a very low 2 percent in April from 4.75 percent nearly seven months earlier. He engineered special lending operations for financial institutions in trouble. And he acknowledges the decline in labor’s bargaining power.
The federal funds rate greatly influences interest rates for mortgages, car loans and much other consumer credit. When it rises, economic activity inevitably slows, and if the funds rate were to rise now, the slowing would be on top of the downturn already in progress.
That would be overkill, said Brian Sack, an economist at Macroeconomic Advisers and a former Fed economist. “We are just not seeing upward pressure on labor costs,” he said, arguing in effect that the eruption of a wage-price spiral in the near future is as likely as freezing temperatures in July.
“We could be in a world,” Mr. Sack said, “where workers will have limited ability to negotiate higher pay and companies will have limited ability to raise prices.”