Fed looking for inflation? Cut rates in an healthy economy!
“It is not who is right, but what is right, that is important.”
What seemed highly unlikely in March now seems very likely to happen.
The Fed is probably preparing to cut rates once and maybe as many as three times this year. Look at the fed funds futures if you need verification. The bond market seems to have gotten the central bank’s attention. Rates on the long end of the curve have fallen significantly over the past couple of weeks creating the usual chatter among the talking heads about yield curve inversion and eventually a recession.
Ironically, as recent as March of this year not one of 17 Fed governors were forecasting a rate cut this year and almost half were calling for at least one increase in the funds rate. Has so much changed so quickly? And what help can rate cuts bring to a domestic economy that seems to be doing well? Recall that 1st quarter GDP was reported at 3.4%. This was after the stock market selloff in the 4th quarter that seemed to predict a slowdown. But the global economy is slowing, brought on by escalating trade disputes. Trade is much less a part of our economy (10%) than other countries (up to 50%). If the Fed is looking to help with the global slowdown by cutting rates, it may need to look elsewhere.
But if the Fed is looking to get inflation nearer its policy targets, then cutting rates in an already healthy economy may be the answer.
Labor markets are tight and any increase in spending brought on by lower rates could put pressure on wages and prices. Productivity, brought on by increased capital investment, will need to keep pace for inflation to stay tamed. But with so much uncertainty in the global environment and our economy at full employment, capital investment may not be as robust as needed. Higher prices may be in store. The US economy seems to be doing just fine. The world economy is not and it’s doubtful that the Fed has the prescription for fixing it.
The stock market was wrong about the economy last year. Maybe the bond market has it wrong too.
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