12/08/2014 12:48 pm ET Updated Feb 07, 2015

Fed Shouldn't Be Raising Interest Rates Any Time Soon

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A lot has changed in the last 20 years since then-Federal Reserve Vice-Chairman Alan Blinder had the audacity to suggest, in a speech, that the Fed could use interest-rate policy to help reduce unemployment in the short term. It was real blasphemy back then, and despite the fact that the Fed had by law a dual mandate to maintain both "price stability" and full employment, his remarks ignited a firestorm of controversy.

Now, thanks to the Great Recession, and Ben Bernanke's willingness to use zero interest rates and venture into uncharted territory with quantitative easing, the "dual mandate" is widely accepted. Both Bernanke and current Fed Chair Janet Yellen also spoke out in favor using fiscal policy (i.e. deficit spending) to increase employment, something that U.S. Fed chairs didn't say in the past. In a recent speech, Yellen noted that "the lack of fiscal support for demand in recent years also helps account for the weakness of this recovery compared with past recoveries."

These are important institutional advances, even if other branches of government -- most importantly the Congress -- are not smart enough to take advantage of free money to create some of the millions of jobs that are so desperately needed. But today's Fed could still be a threat to full employment if it proceeds too early with the "normalization" of interest rates that even Ms. Yellen is talking about. And everyone is talking about some time next year, and that is too early.

To "normalize" interest rates -- i.e.,begin to raise short-term rates -- we would want to see at the very least a "normalized" labor market. Unemployment at 5.8 percent might look like it is getting somewhat close to "normal" but other statistics show that it is not. We can look at the percentage of prime-age workers (25-54 years old) who are working, and it has not recovered even half of its loss since the peak before the Great Recession. Since these are prime-age workers, this cannot be attributed to demographics; it is due to people dropping out of the labor force and therefore not being counted as unemployed.

As my colleague Dean Baker has pointed out, it would take another 7-8 million jobs to get us back to pre-recession levels of employment. Another measure of the economy's current weakness is lost output: The Congressional Budget Office estimates that we are 4 percentage points below our potential GDP, or about $2,000 per person lost.

The percentage of long-term unemployed (out of work for at least 6 months) is also still highly elevated at about twice its pre-recession level; and these people can become permanently unemployed if they are without work for too long. African-Americans have about twice the unemployment rate as do white workers. And then there are wages, which have barely risen more than inflation in more than 5 years of recovery.

Some analysts think that the Fed should hold off on raising interest rates, but only until real (inflation-adjusted) wages begin to rise. But this would only perpetuate the intolerable increase in inequality that the majority of this country has suffered for more than three decades. Wages can safely rise faster than inflation not only because productivity (output per worker) increases annually, but also because profits are extraordinarily high. There is a lot of catching up to do, and the Fed shouldn't cut it off early.

With inflation still running at 1.7 percent and downside risks such as the slowing world economy, there's no excuse for the Fed to be throwing people out of work by raising interest rates. Let's hope that public pressure and an improved debate over Fed policy can keep this country moving toward full employment.

This article was distributed by McClatchy Tribune Information Services on December 4, 2014, and published by the Austin American Statesman and other newspapers.