The Federal Reserve Board raised interest rates on Wednesday. According to comments from Chair Jerome Powell and other Fed board members, they believe that the unemployment rate is approaching, if not below, levels where it could trigger inflation. The hike this week, along with prior hikes and projected future hikes, was done with the intention of keeping the unemployment rate from getting so low that inflation would start to spiral upward.
This is not the same as “express[ing] confidence that raising borrowing costs now won’t hurt growth,” which is the view attributed to Fed officials in the New York Times‘ “Thursday Briefing” section (6/14/18). The point of raising interest rates is to slow growth, so they absolutely believe that higher interest rates will hurt growth. The point is that the Fed wants to slow growth, because it is worried that more rapid growth—and the resulting further decline in unemployment—will trigger inflation.
Chair Powell did say that he didn’t expect higher borrowing costs to choke off growth, but that is not the same as saying that he doesn’t believe it will slow growth.
Dean Baker is a senior economist at the Center for Economic and Policy Research in Washington, DC. A version of this post originally appeared on CEPR’s blog Beat the Press (6/14/18).
hat tip: Robert Salzberg