Fed Raises Interest Rate Despite Slow Wage Growth

Janet YellenToday, the Federal Reserve raised interest rates .25%. Markets have so far failed to react strongly and are up for the day. This news was not a surprise to markets, which had been anticipating a move like this for months.

The adjustment marks the first rate increase since 2006 and projects confidence in the US recovery. I don’t share the Fed’s enthusiasm. While it’s true that the unemployment rate has fallen to 5%, the labor pool is much smaller than what the US has seen in past recoveries. More worrying, is the lack of wage growth.

Further, we have yet to see the inflation that generally creates the need to raise rates and pull money out of the economy. Inflation has held under the 2% target rate for years and that’s even without factoring in the price of oil (which has plummeted over the past year).

This Chart of CPI comes from a Mathew Yglesias article on Vox.com

This Chart of CPI comes from a Mathew Yglesias article on Vox.com

My fear regarding rate hikes is not so much today’s move (though I think it’s premature) it’s what Yellen’s Fed may have planned for the coming year. If the economy continues to chug along without significant wage growth or a bump in the number of actual people employed (not just the official unemployment rate) we will scuttle this recovery by fighting an inflation boogieman who never appeared.

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