U.S. policymakers are putting the longest expansion in U.S. history in jeopardy. First, let's look at monetary policy. The Federal Reserve is clearly determined to slow the economy. The nation's central bank hiked rates by a larger-than-normal half-point last Tuesday, and warned that further rate increases could come over the summer. The Fed, along with most mainstream economists, is convinced the U.S. economy is growing at such a fast pace and unemployment has dropped so low that inflation is unavoidable unless the economy decelerates. Of course, the Fed has been fretting about tight labor markets reviving inflation since 1996. The risk now is that the Fed tightens too much and sends the economy into a tailspin.

The Fed's campaign to throttle back the economy makes the fiscal side of the policy ledger even more important. Specifically, Congress is slated to vote on granting China permanent normal trade relations next week. Approval would essentially guarantee China's membership into the World Trade Organization, an important step toward integrating the Asian giant into the rules and disciplines of the global trading system. The U.S. has benefited enormously in recent years from more open borders worldwide, and the new economy is all about making markets as large as possible. A negative vote would both signal a dangerous retreat from the policy of trade liberalization and impose a psychological drag on economic vitality.

The odds are that the economy will remain healthy, the Fed will soon declare victory against inflation, and Congress will endorse the China trade bill. Nevertheless, the downside risk is there.