The decision by the Federal Open Market Committee (FOMC) today to raise interest rates for the third time in six months is a clear mistake, even judged against the Fed’s too-conservative 2 percent inflation target. The price index for “core” personal consumption expenditures (an index excluding volatile food and energy prices which is useful for assessing the economy’s inflationary momentum) has not been above the Fed’s 2 percent target since early 2012, and has not been above it on a sustained basis in a decade. On a year-over-year basis, core prices have fallen in the past two months. Further, last month’s jobs report saw weak employment growth, weak wage growth, and a large decline in the participation rate of potential American workers. In short, the data fully supported a pause in the Fed’s interest rate increases.
Today’s decision seems to indicate that the Fed is on autopilot to raise rates, regardless of what the data argue. This will lead quite soon to a pronounced slowdown in economic activity and job growth, and could essentially mean that we never manage to achieve genuine full employment or give American workers a real chance at sustained, durable wage growth. After acting with admirable dispatch and purpose to end the Great Recession and spur a faster recovery for years, the Fed is in real danger of not completing the task it set itself ten years ago, and has instead backslid into caring more about keeping unemployment and inflation at levels that wealth owners and corporate managers are comfortable with, rather than at levels that benefit American workers.