Fed Raises Interest Rates Again, Based on Nothing in Particular

Well, the Fed has gone ahead and raised interest rates, as expected:

“The labor market has continued to strengthen,” the Fed said in an upbeat statement published after a two-day meeting of its policy-making committee. The Fed added that economic growth “has been rising moderately so far this year,” making no mention of the reported weakness last winter.

Hmmm. Both GDP growth and new job creation have been modest over the past year. The unemployment rate is down, but it’s increasingly looking like the headline unemployment rate is not a great measure of labor tightness. Here’s a couple of other measures. First, hourly wages of production workers:

Ordinary workers did pretty well in 2015, but it’s been all downhill since then. Over the last few months, their earnings have barely risen at all. That’s hardly consistent with a tight labor market.

And here’s the core PCE inflation rate, the Fed’s favored measure of inflation:

It’s nowhere near the Fed’s target of 2 percent, and if you can see any acceleration in this chart you have sharper eyes than me. It looks dead flat at around 1.6 percent for the past four years. That’s also hardly consistent with a tight labor market.

The economy is doing OK, and perhaps that’s the best argument in favor of the Fed’s strategy: they’ve been slowly raising interest rates and the economy hasn’t fallen off a cliff. On the other hand, the labor market for the working and middle classes sure doesn’t look especially tight. Inflation isn’t rising and wage growth has been anemic.

It’s hard to see how raising interest rates is doing anybody outside the top 1 percent any good. I sure hope Janet Yellen knows what she’s doing.


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