This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission
When the Fed meets later this month, it is now widely expected to cut interest rates
Inflation has remained sluggish and there are signs that the economy is slowing, but cutting rates at the first signs of danger seems strange: not only are pre-emptive cuts rare, but the unemployment rate is below most estimates of the natural rate, and on a downward trend. The economy is operating above capacity, and a cut would reinforce the view that the Fed is pandering to the markets, and the President.
What powder left to use when the economy really hits the rocks?
Mr Powell seems to have backed himself into a corner, and there is no easy way out.
But in a temporary cessation of analysis, criticisms and inquests, in this Friday afternoon blog post I propose that we all chill out – investors, central bankers and economists.
I’ve drawn a little inspiration from Bob Marley’s No woman, no cry, while putting a little personal spin on the lyrics.
No rate cut, no cry
No rate cut, no cry
No rate cut, no cry
No rate cut, no cry
Said – said – said I remember when interest rates used to be
Above five percent post recessions
Oba – observing the hypocrites
As they would try to buy the independent Fed
Good companies we had, oh, good companies we lost
It’s called creative destruction
And with r* so low it’s easy to forget the past
So dry your tears, I say
And no rate cut, no cry
No rate cut, no cry
Investors, central bankers, don’t shed no tears
No rate cut, no cry
Said – said – said I remember when interest rates used to be
Above five percent during recessions
And Paul Volcker would make those rates tight
Causing emerging market capital flight (flight)
But over the years, something went wrong
And so I’m telling you (you)
You see, those rates, they aren’t the only thing
So Powell should take a chill pill
‘Cos if he stays on hold-a baby:
Everything’s gonna be all right!
Everything’s gonna be all right!
Everything’s gonna be all right-a!
Everything’s gonna be all right!
Everything’s gonna be all right – yeah!
Everything’s gonna be all right!
Everything’s gonna be all right-a!
Everything’s gonna be all right!
No rate cut, no cry
50 basis points? No, no rate cut, no cry
Hey politicians, try something else
No rate cut, no cry
Brian Davidson is a senior economist at Fathom Consulting in London, England. This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission
4 Comments
The Jamaican Inflation targeting campaign
Inflation has remained sluggish and there are signs that the economy is slowing, but cutting rates at the first signs of danger seems strange: not only are pre-emptive cuts rare, but the unemployment rate is below most estimates of the natural rate, and on a downward trend.
LOL - Everything’s [not] gonna be all right!:
Our current estimates of r-star in the United States are around half a percent. That’s actually now lower than at any time before the Great Recession.2 We’ve seen similar declines in r-star in other advanced economies, including in Japan and the euro area. Link
No wonder FRBNY officials walked back this fellow's interpretation of reality so quickly. All previous Fed "stimulus" actions were rendered null and void.
Is it a concern, a fundamental one certainly, that a long period of very low interest rates might impact negatively as far as
Businesses have already borrowed as much as they might need, to expand and employ more. Are they now being encouraged to over commit by borrowing more than they need just because they can.
Homeowners are upgrading homes or moving upmarket or simply borrowing against existing equity to spend elsewhere, just because they can.
Prospective new homeowners unable to achieve effective returns on savings invested towards a deposit.
Retirees, pensioners already have had the return from their life savings severely depleted. Does this mean, less heating of the home, less healthy diet, less doctors visits simply because they can’t. Does that mean more sickness burdening our health system etc.
Apart from the above, it would seem obvious that the positives to be expected from interest cuts, all of them over more than five years now, have done their dash. So what about something novel like the tax cuts National had foreshadowed? But of course this is a Labour government, put the chewing gum back on the shelf, and go wash your mouth out.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.