Today’s decision by the Federal Reserve to raise interest rates was expected, but is a mistake nonetheless. Today’s increase is the 4th in the past year—despite the fact that the year began with nominal wage growth running below a pace that would put upward pressure on the Fed’s price inflation target, and this nominal wage growth has decelerated over the past year. The core inflation measure most referenced by the Fed has spent the past year—like the 5 years before—below the Fed’s target, and has similarly decelerated in recent months.
The U.S. economy has improved steadily since the end of the Great Recession, and much of the slack in the labor market has been wrung out. But most workers are just seeing the leading edge of wage gains and have yet to come close to recouping the losses suffered over the past decade. Given this, and given that no sign of accelerating inflation is in the data, the clear course of action is to let the recovery continue unabated to see how much of the scarring of the Great Recession can be healed.
Today’s meeting will also be the last for Janet Yellen as Fed Chair. Yellen has done an admirable job as a Federal Reserve governor in the past decade, and her wisdom will be missed. Her absence from future meetings is another reason to worry that recent interest rate may become automatic and untethered from data over coming years.