The Fed's Interest Rate Hike Will Prevent People From Getting Jobs

(Photo: Greg Dunlap; Edited: LW / TO)

This month the Federal Reserve Board raised interest rates for the third time in the last year and a half. This move did not get nearly as much attention as it deserves.

The decision to raise interest rates was a conscious decision to slow the rate of economic growth and job creation. It will raise interest rates that people pay on credit cards, car loans, home mortgages and other types of debt. It will also raise the cost of borrowing for businesses looking to invest and state and local governments borrowing for infrastructure.

As a result, we will see less spending and borrowing and therefore slower economic growth. The Fed is slowing the economy because it fears that too rapid growth will trigger inflation. I think this view is wrong, but before making the case it is worth making a couple of basic points about the logic of the Fed’s rate hike.

First, the Fed is raising interest rates because it is concerned that the economy is creating too many jobs. Last month, the Labor Department reported that the economy added 235,000 jobs. The concern at the Fed, and among many other economists, is that the demand for labor is outstripping the supply of labor. This will lead to upward pressure on wages, which will then be passed on in higher prices, potentially leading to a wage-price inflationary spiral.

Note that this concern is 180 degrees at odds with the “robots are taking our jobs” story. The robots taking our jobs story is one in which we don’t have enough jobs and we have too many workers. The Fed obviously is not concerned about robots taking all the jobs or it wouldn’t feel the need to raise interest rates.

It’s worth noting that the data agree with the Fed here. Productivity growth, which measures the rate at which jobs are being replaced by technology, has been extraordinarily slow in recent years, averaging less than 1 percent annually over the last decade.

By contrast, productivity growth averaged 3 percent between 1947 and 1973 and…

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