On June 14, the Federal Reserve increased rates (as expected) by .25%, and we have already seen credit card companies pass this on to their consumers.
So – why did the Fed increase rates, and what impact might this have on our economy?
President Obama’s economic recovery from the Great Recession now appears stable, with an acceptable inflation rate nearing 2% coupled with historic employment rates. Normally we should expect to experience mild wage inflation in the coming several quarters as the labor market tightens for those companies seeking workers. This inverse relationship between employment and inflation is best understood by the Phillips Curve.
This may be great news for increases in our wages, reducing pressure on legislators to increase the minimum wage. But it also means our Federal Debt will grow by over $50B per year for every .25% increase in the Fed Rate (we have had two already within the last 12 months). The Fed expects to increase rates at least 3 more times over the coming year.
It will cost you more to borrow for your business, a home, and any short-term expenditure that you are planning. It will also cost our government more to service the national debt, limiting critically needed investments in infrastructure repair, education, and healthcare.
Actions by the House to revoke financial protections under Dodd-Frank coupled with confusion around President Trump’s deregulatory agenda may require accelerated tightening by the Fed. Uncertainty adds risk that the Fed is factoring into their monetary policy over the coming several quarters.
The President is pushing for a tax overhaul much like we saw during President George W. Bush – a dangerous return to supply-side economics. The impact would be disastrous, further increasing inflation and our national debt, without increasing tax receipts (because of cuts) needed to pay for much needed strategic investments and the resulting increase in debt service costs from interest rate hikes by the Fed.
Your Congressional Representative needs to understand this balance, and protect his constituents. I’m that guy.
Our financial security is a matter of National Security.