By Thomas Palley
Cross-posted from the AFL-CIO economy blog.
Wednesday’s decision by the Federal Reserve to raise interest rates is unwelcome and unnecessary. As admitted in its statement, investment remains soft, growth is only moderate and inflation expectations are little changed. Moreover, the economy confronts financial headwinds from the recent jump in long-term interest rates and an even stronger dollar.
The Federal Reserve seems to be relying on old economic thinking that should have been discarded after the financial crisis. That poses a danger the economy will be slowed before full employment is reached, putting a stop to workers reclaiming their fair share.
If the Federal Reserve is worried about financial market exuberance, it should use its regulatory tools and not the blunderbuss of higher interest rates. Financial markets must not be allowed to stampede the Fed into raising rates.
An alternative strategy for monetary policy is briefly described here:
The Federal Reserve Must Rethink How it Tightens Monetary Policy