As was widely expected, the Federal Reserve Open Market Committee (FOMC) raised interest rates today. I think they will look back on this as a mistake. While rate hikes over the past couple of years have been premature in the face of tame inflation, coming into this month’s FOMC meeting there have been real signals flashing in the data that these past rate hikes are starting to slow the economy. Residential construction has contracted for three straight quarters in 2018, the first year this has happened since 2009. The trade deficit has widened recently and dragged on growth as well. Both of these developments are key data signatures of higher interest rates starting to bind on the economic expansion. By 2019, this drag from higher interest rates will no longer be counterbalanced by greater fiscal stimulus, and the pace of economic growth could slow markedly. This threatens to snuff out the very beginning of wage gains that we’ve started to see recently in the data. The Fed should allow the expansion’s gains to reach more broadly into the workforce and get off the steady escalator of ever-higher interest rates.
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