As the FT has reported:
The Federal Reserve has signalled that it could hold interest rates steady at least through September as it defies Donald Trump's repeated calls for the central bank to dramatically lower borrowing costs.
The central bank left borrowing costs unchanged at 4.25 per cent to 4.5 per cent after a meeting on Wednesday, despite an aggressive campaign by the US president to slash borrowing costs to 1 per cent and continuing uncertainty over the impact of his trade policy on the economy.
There are three obvious questions to ask. They are:
- Was the Fed right to hold rates?
- Is the Fed right to expect to hold rates?
- Is there more going on here?
The answers are not clear. The need for action has to be extracted from the noise of the ongoing issues, which are:
- Trump is doing his best to trash the US economy.
- Latest US GDP data shows that Trump is having a massively disruptive effect on that economy, which will almost certainly get worse as tariffs really kick in.
- The US is facing a stock market meltdown.
- What is required to manage a recession is as yet uncertain, but will almost certainly be serious interest rate cuts.
In principle, my position is clear: in normal times the Fed's rates would be too high for the US economy, and a cut would not only be desirable, but even essential, for the US, for the world economy and most especially for all those states whose liabilitis are denominated in dollars, all of whom are desperate for rates to fall.
These are not, however, normal times. They are anything but that. Trump is threatening mayhem, and in the face of that, the Fed is taking time to do anything, and that is what a central banker always does in this situation. That might be forgivable for two reasons:
- The Fed needs to see what is happening, and they think time will provide that perspective.
- They are fighting a political battle with Trump when few others are, and they are determined to continue to do so.
I think that, in these exceptional circumstances, their actions might be justified. However strong my desire for cuts, which could lead to similar outcomes in the UK, the US Fed might just be right to be on hold right now.
But, and I cannot stress the point enough, that might be true for the next month or so, but it is not sustainable. The Fed has to decide:
- What they think is happening.
- When they believe the consequences might arise.
- How to signal what they will do about it.
In a world of massive economic uncertainty, I think they have a duty to do that. But will they? The possibility that they might still prevaricate is real, and that will then become mightily problematic. Powell faces the need to make up his mind, and soon.
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My take on this is as follows.
The stock market is just a shop window where everyone’s hard work is put on display for the idle rich to play with, extract assets and rents by assuming ownership and other rights.
If we accept this, then we can accept that these markets can also be manipulated to cause stock listed companies problems that weaken their position, undermine their viability, enabling them to be snapped up.
What I’m saying is that the stock market is nothing but a wealth transfer engine designed to create crises and other ruses to create weaknesses in companies. With Trump, the prospect is that this model will now eat itself – achieving perfection in the process. It has always been disaster capitalism turning out monopolism.
My worry is that The Fed does not understand this at all.
Good analysis.
I saw Takis Varoufakis on a Youtube last year. He said ‘when we were young we wanted to destroy capitalism. We never thought it would destroy itself.
Does he have a point?
Yes
But he wasn’t original
Marx said that
Trump wants lower interest rates for his own political gain. The fed don’t want to surrender the last of their power that they have got. It is not about economic policy or the interests of the nation.
I note that it was not a majority agreement. This is very rare event in US monetary policy. There are usually backroom discussions and the committee meeting is a public ritual which asserts that there is agreement. Failure of agreement shows that there is cracks in the armour of the FED, which is perhaps what Trump is looking for.
Presumably the Fed are anticipating that the inflationary consequences of Trump’s tariffs will begin to be felt, and, being good central bankers are using the only tool at their disposal to fight it. Could it help in this exceptional case? I am no expert but if it does, surely it will be at the cost of jobs and general stagnation?
They will have to cut rates to prevent a deep recession. It’s just when right now.
The noise is politics.
Do you agree with Warren B Mosler? –
“The Fed could set rates at zero and leave it there forever. […] Government checks don’t bounce. The only reason we pay interest is because we choose to.”
“Higher rates are a free lunch for the wealthy. It’s a welfare program for people who own Treasury securities.”
Essentially , yes
But I mean real rates are zero, or very close. I would allow for inflation, give or take as the economy demanded.
The Fed are protecting the dollar by resisting any pressure to reduce interest rates. The dollar has weakened against other major trading currencies over the last six months or so. This makes US imports more expensive and US exports cheaper. Trump’s ridiculous ever- changing tariffs are also increasing import prices for US consumers and making US exports less attractive where retaliatary tariffs are applied by those countries on the receiving end of Trump’s tariffs. If the Fed acceeded to Trump’s demands, the dollar would probably weaken further, which might be good news for UK because oil is priced in dollars. Lower oil prices should feed through to almost everything.That’s the theory- and it seems to be infallible in the opposite direction.