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Will The Fed Raise Interest Rates Helping Wall Street And Hurting Main Street?

The economic news for America’s hard-pressed working families couldn’t be better: Last week’s jobs report showed unemployment at 4.1%, its lowest for 17 years, and average hourly earnings rising at an annual rate of 2.9%, the highest in eight years.

A year into the Trump presidency the American economy has seen solid growth, more people in jobs and Wall Wall StreetStreet breaking records on a regular basis.

However, in the alternative universe where Wall Street’s Masters of the Universe and the mandarins who control America’s Federal Reserve Bank live, good news for America’s middle-income families is apparently bad news.

Economic fundamentals, reports the UK Guardian’s Larry Elliott, are good and there will be no real inflationary threat from rising earnings provided productivity also picks up.

But that hasn’t stopped many – including Mr. Elliott – from calling for the Fed to raise interest rates to cool the economy and slow wage growth.

New York Federal Reserve President William Dudley said he expects unemployment to remain low and wages to quickly rise. However, faster economic growth from tax cuts when the labor market is healthy, and lending is cheap could cause the economy to grow too quickly.

Dudley has previously called the tax cuts unnecessary at a time when the economy is already growing at a steady pace, which is likely to help increase inflation over time. If the economy grows too fast, he said the Fed will have to raise interest rates faster than expected. That could make borrowing money more expensive – given that the federal funds rate helps determine lending rates.

Dallas Fed President Robert Kaplan made a similar pronouncement saying that cyclical inflation pressures are building with unemployment low.

Jed Graham of Investor’s Business Daily says while “wage hikes from the likes of Walmart, Starbucks, and JPMorgan Chase announced in the wake of tax reform provide some reason to expect a pickup from the lackluster gains of recent years, IBD presented three reasons why the January pay raise reported by the Labor Department was less than meets the eye. Still, investors' reaction reflects Wall Street's nervousness about leaving behind a Goldilocks era of so-so economic growth and tepid inflation, accompanied by strong stock market gains.”

In other words, low inflation, accompanied by slow economic growth, no wage gains and higher unemployment is the goal the policymakers are seeking to sustain “strong stock market gains.”

The reality is that, looking back at 2017 and forward into 2018, the Trump economy is far from overheating.

As Andrew Soergel, Senior Economy Reporter for U.S. News and World Report explained, “The U.S. economy enjoyed another respectable year in 2017, as the labor market continued to plug along and gross domestic product growth maintained a 2.3 percent pace of expansion.

The country's latest GDP report, published Friday by the Bureau of Economic Analysis, profiled a cooling economy during the final three months of 2017, with growth easing to 2.6 percent after eclipsing 3 percent during the second and third quarters.”

In all, says Soergel, the economy during President Donald Trump's first 12 months in office fell short of his administration's eventual goal of 3 percent annual expansion. But it still maintained what Gus Faucher, a senior vice president and chief economist at The PNC Financial Services Group, describes as "solid" – though not necessarily "fantastic" – progress that could be bolstered by America's new tax legislation.

Faucher told Soergel, “Growth was a bit slower in the fourth quarter compared to what we had in the second and third quarters, but a lot of that was due to inventory. So, I think, what we have is an economy that is expanding at a solid pace, that we are continuing to reduce slack in the labor market and that the expansion should continue in 2018.”

Faucher went on to say, “We have solid growth. We don't have fantastic growth. But it's certainly more than enough to reduce slack in the labor market. And the good news is, there's no reason why the economy can't continue to expand at this pace for the next two or three years.”

Here’s the key point we took away from Soergel’s interview with Mr. Faucher, “The fundamentals are solid, so I don't think a 10 percent of 15 percent correction in the stock market would necessarily signal something is wrong with the economy. But if businesses get scared because of a decline, or if consumers get scared and start to pull back, then it could become self-fulfilling. So, although I don't think that would disrupt the expansion, it has the potential to.”

President Trump campaigned on policies that would boot the economy to 4 percent – or greater – growth. Now, just when America’s hard-pressed middle-income families are beginning to see the benefits of Trump’s policies, is not the time for the Fed to cool the economy.

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