Post by Old Badger on Aug 1, 2019 9:57:05 GMT -5
That's the question raised in a number of analytical pieces following yesterday's 1/4-point decrease in the Fed funds rate. This was unusual, given current economic conditions: "The last time the Fed cut rates was in December 2008, when unemployment was over 7 percent (and rising quickly), the stock market had lost a third of its value, and a major financial institution, Lehman Brothers, had just declared bankruptcy, rocking the financial system. Today unemployment is at a half-century low (3.7 percent), the economy is growing at a healthy pace (over 2 percent) and the stock market is sitting at record highs." link In other words, this is a weird time to be cutting rates, so why'd they do it? Three reasons:
1. Trump’s trade war. There is concern about the trade war, as well as weakness overseas, dragging down the U.S. economy. A closer look at the U.S. economy reveals there are already a few yellow, if not red, flags. Manufacturing was in a "technical recession" the first half of the year, the housing market remains sluggish, and business investment tanked in the spring as corporate leaders grow more wary of the ongoing trade tensions...
2. The Fed needs to act sooner rater than later. New York Fed President John Williams, among others, has made the case that the Fed has limited medicine in the medicine cabinet to aid the economy and that it’s better to administer the pills at the first signs of trouble rather than waiting for full-blown illness when there might not be enough medicine left to make a difference...
3. Inflation is too low. The Fed wants to see inflation of about 2 percent a year. For the past several years, it’s been running below that threshold and is currently sitting around 1.6 percent. Some Fed leaders, such as St. Louis Fed President James Bullard, say the Fed should cut rates to try to run the economy a bit hotter to boost inflation. They see little risk in doing this since inflation is so low, but they see great risk in not getting inflation back to target because business leaders will stop believing that 2 percent is the true target if it is never achieved.
Two FOMC members (Boston, Kansas City) voted against the cuts, fearing that they will spur speculative bubbles, as happened in the early 2000s. Others fear that the Fed seems to be caving to Trump's insistence on lower rates (precisely to offset his self-harming trade war, though he does not admit that), leading the Chief Economist at the Chicago Mercantile Exchange Group to write: “I have to conclude the Fed has lost some independence here.” Let's hope he's wrong. In any case, it's clear that Trump's economic policies are creating the conditions for long-term trouble, but his focus is on November 3, 2020--if he can keep the economy humming until then he can win, if not he's out.
1. Trump’s trade war. There is concern about the trade war, as well as weakness overseas, dragging down the U.S. economy. A closer look at the U.S. economy reveals there are already a few yellow, if not red, flags. Manufacturing was in a "technical recession" the first half of the year, the housing market remains sluggish, and business investment tanked in the spring as corporate leaders grow more wary of the ongoing trade tensions...
2. The Fed needs to act sooner rater than later. New York Fed President John Williams, among others, has made the case that the Fed has limited medicine in the medicine cabinet to aid the economy and that it’s better to administer the pills at the first signs of trouble rather than waiting for full-blown illness when there might not be enough medicine left to make a difference...
3. Inflation is too low. The Fed wants to see inflation of about 2 percent a year. For the past several years, it’s been running below that threshold and is currently sitting around 1.6 percent. Some Fed leaders, such as St. Louis Fed President James Bullard, say the Fed should cut rates to try to run the economy a bit hotter to boost inflation. They see little risk in doing this since inflation is so low, but they see great risk in not getting inflation back to target because business leaders will stop believing that 2 percent is the true target if it is never achieved.
Two FOMC members (Boston, Kansas City) voted against the cuts, fearing that they will spur speculative bubbles, as happened in the early 2000s. Others fear that the Fed seems to be caving to Trump's insistence on lower rates (precisely to offset his self-harming trade war, though he does not admit that), leading the Chief Economist at the Chicago Mercantile Exchange Group to write: “I have to conclude the Fed has lost some independence here.” Let's hope he's wrong. In any case, it's clear that Trump's economic policies are creating the conditions for long-term trouble, but his focus is on November 3, 2020--if he can keep the economy humming until then he can win, if not he's out.