There is only one rational to keep interest low, the betterment of the 1%. To allow them to borrow more at low interest to build more unnecessary structures or take over other businesses and slash jobs. Trump lives off borrowed money, do you think he will abide any member of the Fed that does not do everything possible to hold interest down?
Low interest is necessary to keep financially imprisoning people who do not have the ability to live within their means. One day this bubble will again burst and we the people will have our politicians take from our pockets one more time to bail out the banks and failing big business while we get nothing.
This country is no longer a democracy or republic, it is no different than communism or socialism the only discernible difference is that the WASP is the leadership and only beneficiaries of this system.
12
Notwithstanding passing comments about the "fragility" of the global economy, Mr. Irwin seems to accept appearances of "solidity" as the actual reality. He and the Fed both ignore the house of cards that forms the underlying structure of this "solidity". The so-called expansion of the last ten years is the result of massive injections of monetary and fiscal amphetamines by central banks and the U.S. government respectively, which in normal times would have pushed inflation into records highs. So Powell, in alliance with Trump, wants to give it another shot. It won't work for long.
13
This could help to slow the damage to Obama's economic recovery that Trump's tactics will lead to.
7
Maybe Congress needs to address this. The legislative "dual mandate" may be obsolete.
3
When I hear economist talk about a "new reality" it usually means that they intend to ignore past wisdom. Often it ends bad.
9
Basically no "old rule" any longer applies to anything, now that we have a corrupt dictator president in charge and he's running for re-election. That explains just about everything happening in DC nowadays. No one ever mentions what the persistent low interest rates and even further cuts mean for millions and millions of elders, many whom depend, in part at least, upon the earnings of the money they saved. Unfortunately, many of them appear to be too dumb to understand what is being done to them.
10
I think it is a failure to not mention what the global inflation trends are. The trade wars and the geopolitical situation with Iran are going to create unexpected price spikes.
4
In some ways I think Powell has it very right in suggesting both a 'new economy' and recognizing the international effects of US Fed rates. But my suspicion is that a rate cut won't do much to help the world economy, and the US economy suffers from problems that have nothing to do with Fed rates (more like bloated monopolies and bloated inequality).
And my fear is that all that will be accomplished is a minor blip that will make Donald Trump look good, at the price of losing tools to help when the inevitable recession hits.
15
The real truth is that the economy is not booming enough to even support a 2.5% rate. A median of 4% was supported easily in previous expansions. Since inflation is just under 2% that means savers were getting a little bit over 0.5% on their savings over depreciation of money in the best of cases. The Trump pressure also made heavy influence in the cut thinking. But when you get down to it, the economy is only working for the higher earners and stagnating for the rest.
16
Let's imagine for a moment that the Fed's inflation objective was 1.5%, rather than its actual objective of 2%. In that case, the Fed could argue it has achieved nirvana, with both strong growth and inflation right at its objective. Instead, it believes it has a problem because it has not quite achieved its inflation target of 2%, which is just as arbitrary as a 1.5% objective would be. To a degree the Fed is hostage to a framework entirely of its own making.
I am old enough to remember the early 1980s when inflation expectations and interest rates would move 100 basis points or more in a week. Now we have incredibly low and stable inflation. Policy-makers from 40 years ago would love to have had the environment that today the Fed views to be somewhat problematic.
There is probably always a temptation for policy-makers to do something, when at times they should just stand there and do nothing.
19
The best reason why the jobless rate is so low is many people are working two and sometimes three jobs to just get by.
The best reason to keep interest rates low is because without an minimum wage of at least $15.00 per hour the low wage jobs will continue with no end in sight.
7
I am amazed that the fed says we have " low inflation".... How is it being measured? My ACA health insurance has gone up 10 per cent, my car insurance 12 per cent, my internet bill 20 per cent.... All bills are up. Meanwhile I can only invest in the stock market because the rate of return on CDs is so low....
I have a low fixed income and not much to invest, so I would like to get it right. Frankly, for many Americans, the future is bleak.
25
@insomnia data Because they estimate using a theory of "substitution." When beef prices rise, the market basket is changed to chicken for inflation estimates. When chicken gets too expensive, they substitute off brand dog food. Internet too expensive? They substitute crystal radio and hand puppets. Health insurance out of control. Simple, just replace it with your local voodoo priest and juju. Silly? Yes, but that is essentially how "inflation" is kept under check.
4
Oddly imbalanced article. No mention of corporate debt bubble, stock market bubble or political pressure to lower rates. No mention of potential loss of Fed credibility if recent core CPI number (solidly at 2% target and rising for a year) continues rising and they have to reverse course quickly. Just as Powell appears subsurvient to markets and Trump, this article appears subsurvient and unquestioning to the Fed. How about the idea that low rates can actually dampen inflation during ZIRP regimes? There's a research paper on the St.LouisFed site about it. Again, no mention.
16
@Eb
"Political pressure" - you nailed it.
3
The unprecedented uncertainties will grow more and faster the longer we postpone the transition to a low-carbon economy. The Fed will face an increasingly unstable financial system, and a reduced ability to safeguard it. The Fed Chair could help speed up the low-carbon transition and thus increase the likelihood that the Fed is still going to be able to maintain financial system stability in the future. Joining other central banks in the Network for Greening the Financial System (NGFS) would be a start.
6
Inflation? How is the Fed measuring that? Many aspects of our lives are way more expensive. Using the current measures of inflation are not accurate when applied to the average citizens budget. And that's only half of the problem.
By keeping rates low, banks make fortunes with the spread. Corporations use the gravy to buy back stocks. Consumers invest in the stock market or risky bonds because they can't get a decent return in a savings account.
So the Fed that is charged with preventing economic disaster is creating it by fueling ridiculous stock values. It is a bubble creator of the first order.
I should be able to park my nest egg in an FDIC insured account and harvest 4 to 5%. THAT would stimulate me to spend more freely creating TRUE consumer demand. Consumer spending being 2/3 of GDP, please tell me why the Fed thinks corporate welfare is the answer when by raising rates would put money into the economy where it belongs - with the people.
Raise rates and raise Social Security payments using a true measure of inflation and watch the people's economy boom. Oh, a few CEOs might need to trim their pay by a few bucks but they won't have to sell all their yachts and all their homes.
31
When the working class was young the wealth was transferred by high interest and low inflation (read wage growth). Now that the working class is getting older, wealth is being transferred with low interest and (impending) high inflation ( read prices). Its the demographics S..
5
At Costco yesterday there was no inflation, the hot dog was 1.50, the pizza 10, and the rotisserie chicken 5, just as they have always been.
In fact, the bread and half and half and Frontera were less than they were last year.
@Rich Murphy
Sure. But tell me about your health insurance premium, the cost of cable, your electric bill and your property taxes.
My cost of living is just about 20% higher than it was 4 or 5 years ago. We travel little. Our income is fixed. The math is not working.
The traditional measures of inflation are bogus in the real world.
10
@Rich Murphy Hmm. We were at Costco on Wednesday, and dog food and contact solution had gone up. I guess it depends on what your buy!
6
The Fed appears to be politicized, just like the courts have become. Full employment, solid economic growth, and low inflation hardly supports the need for a cut in the interest rates. Corporations are not lacking for capital as evidenced by the fact that they are using most of their tax savings to reward stock holders vs. investing in their business. So, lower interest rates are not needed to encourage investment in capital. Trump wants to goose the economy before the 2020 election, and the Fed is giving him what he wants. Like his tax cut, there are very negative long-term consequences to this action.
37
I appreciate Neil Irwin's articles explaining and giving insight into the goings on at the Fed. It looks like the Fed is trying to do the Herculean task of trying to stave off the inevitable recession and soften its blow. I do wish the Fed Presidents would stop speaking out of turn and setting market expectations. The market was expecting 50 bps rate cut based on John Williams' comments and was not happy with the more likely 25 bps cut when everything's said and done. And it's official - Powell acknowledged the Phillips curve is dead. Was it natural demise or Trumponomics?
3
Trump has totally cowed Powell. Powell cannot contemplate any action without asking himself what Trump would want. Congress has declined to give Powell the top cover that any Fed chair needs. Powell is "independent" only in so far as he agrees with Trump; and even when Powell does, he has to be as full-throated as Trump would want him to be. If the stock market declines after its decade run, guess whom Trump will blame--and fire.
19
A perhaps different reason to cut rates: the current rates are out of line with the bond market. The 2 year and longer rates are following market forces but the 3 and 6 month rates are on a very different (higher) path, driven by the Fed. The 1 year rates are trying to compromise. Lowering the Fed targets will better align the shorter rates with the market. It will probably have minimal impact beyond the 1 year rates.
3
The fanfare re Fed policy has nothing to do with me. I have a mortgage, utility bills and some credit card debt. From my perspective prices of goods that I routinely buy are rapidly escalating. I am struggling more than ever from the additional burden of the so called Trump tax cuts. Stop pretending that Fed rates have anything to do with anyone other than the wealthy and Wall St traders. Put it on the back page. This stuff only matters to the very wealthy.
26
The Fed has spoken: More cheap money coming our way. Now Wall Street speculators can front run the Fed via the carry trade and finance their stock purchases with a virtual Fed guarantee that margin rates will stay low. Meanwhile, pension funds will seek higher fixed returns by investing in riskier and riskier assets because investment grade bonds yield less than the rate of inflation. Now I don't pretend to know how, when or why this unwinds, but when it does, it ain't gonna be pretty.
25
The penultimate paragraph refers to interest rate increases in 1998, but I think the meaning (stock market bubble in response to changes in interest rates) and a look at a chart of Fed actions both indicate that there were interest rate reductions.
2
GREAT! Do it now so when the Deficit eats all the growth and the cheap money runs out it will HURT oh so bad. I only pray it happens before the election if it happens after there will be only blame and not on those that caused it. Remember Trump's an avid reader after all, expect he always stops at chapter 11.
12
This could be a dangerous policy. With mounting deficits, and low productivity growth, lowering interest rates could lead to inflation. And if Chair Powell, then quickly raises the rates, that would infuriate Trump in an election year.
5
I may be wrong, but Powell's planned rate cut seems to be based on his analysis of the labor market weakness you presented in last week's column.
Apparently, regardless of the "new data" suggesting the economy is humming along, Powell either still believes there is an underlying weakness within the labor markets, or possibly he is just capitulating to Trump.
I will give him the benefit of doubt here based primarily on my reading of the Fed's recent G19 report, which showed revolving credit growing at an annualized rate over 8%, and non-revolving credit has increased at an annualized rate of 4%.
My point being those robust June retail sales are based primarily on increased borrowing, and not on any significant increase in employee wages.
My benefit of the doubt notwithstanding, the main problem with this analysis is that without any legislation improving worker protections only the corporate sector wins with a rate cut.
However, if the rate cut is based on the Fed's capitulation to Trump, it would seem that all Powell will have accomplished is to recreate the same monetary policies that led to the 2008 financial meltdown.
15
Penultimate paragraph probably means cuts, instead of increases?
1
As I've written in this forum and many others for at least the last five years: cheap and abundant money and other important factors(ease of capital movement,advances in production hardware and software,China's "social contract". etc.) have caused there to be extant and/or latent overcapacity in virtually every industry. That is why central banks continued to get "fooled" by inflationary false dawns.
Certain countries, China being the largest by far, don't adhere to the "law" of supply and demand quite as strictly as western capitalist systems. They'll opt to keep their citizens working even when prices are "soft."
I've shared this view with many of the NYT pundits...
7
@trblmkr
Needless to say(but I will), the phenomena described above can not really be solved through monetary policy.
This is a side effect of globalization and an overzealous expansion of the "free trade club."
6
Mr. Irvin's column never discusses the implication of Central Bank policies of pension plans. It should
The Fed fought the collapse of the 2001 dot.com bubble by engineering the housing bubble , then fought the collapse of the housing bubble by engineering via ZIRP and QE an asset bubble, sending real interest into minus territory
Is this socially responsible policy ?
No.
Take Social Security that be law must invest in US government securities that have negative real (nominal minus inflation) yield
Take today's yield of the 10 year T bill 1.9% Inflation, yr to yr 2.44 % . Real yield : Minus 0.54%
It is keeping up the current exuberance at the cost of tomorrow, when pension plans come due
8
Or Powell could be providing a non-political rationale (i.e., pretext) for overtly facilitating President Trump's reelection. Nothing like juicing the economy to help the incumbent. This interpretation would be buttressed by the Fed raising rates in 2021.
30
The Fed is bowing to Trump, so the economy can scrape along until his re-election. Nothing else makes sense.
44
Let's be blunt. Individual one is on his way to bankrupting the country just like he has done to his own businesses 6 times. He will walk away, family in tow, with everything he can grab as Barr and McConnell and the rest follow suit. Hide your money...And not in a safety deposit box. This move by the Fed is shoring up an empty penny jar.
27
Yadada, yadda, blah, blah, blah.
Blah.
"Mr. Trump will keep being mean to me if I don't cut the rates.
So, yeah, "new normal", if you're into that.
I wouldn't believe me or any statistic that passes my lips if I were you.
If I wanted to keep my money that is.
No, there is no longer a reliable source of national financial information.
I don't know...maybe try Europe or something."
5
Here's why: The Fed works for the wealthy and is happy to obey the president, since boosting Wall Street helps the Fed as well. During the past 10 years, the self-serving Fed has transferred trillions of tax dollars and lost interest on savings from the middle classes and seniors to Wall Street, suppressing labor participation and wages for all but the wealthy, while simultaneously increasing income inequality (correlations previously reported by the NYT). Fed policy during the past 10 years suggests the market, increasingly detached from manufacturing, may no longer be able to survive without public support. If this is the case, significant changes to how the economy is run, including changes in tax policy, will be needed in the future.
19
I am happy to read up on considerations affecting the Fed's decisions. But the complete absence in this article of any mention of the pressures exerted by Trump Inc seems strange.
42
With deficits/borrowing, all over the place from individual, budget, student, trillion dollars corporate welfare, SS, medicare in trouble, the end will come.
The only unknowns are when and how bad.
This will help to accelerate it a bit since Trump is putting pressure on the Fed to keep his faux boom going instead of moderating it which is the Fed's job.
27
One of the Feds mandates is employment and employment is at an all time high so that is not the reason to cut rates. The reason he is cutting rates is to delay the down turn that is inevitable after a long expansion. trump bullied the fed and demanded a cut for re election and the Fed is capitulating.
19
The Fed's dilemma is that raising interest rates may cause asset prices to fall, while cutting interest rates may cause asset prices to rise. This has little to do with employment or inflation but everything to do with a policy that relies on rising asset prices for prosperity. What's your choice: cutting (or leaving at a very low level) interest rates and maintaining prosperity (or prosperity for those who own most of the assets) or raising interest rates in order to tame asset bubbles and avoid another financial crisis. Mr. Irwin's analysis would have been accurate 20 years ago, but not in the world today. I don't blame him, as only a handful of leading economists will even admit the dilemma. Indeed, many economists have devised ever more creative ways to maintain rising asset prices, including a Fed commitment to buy assets (including equities!) if asset prices fall.
12
@reaylward
Fed does seem to be weighing trade-off between asset-values and employment.
Unfortunately, legislators enacted legislation that favored irresponsible asset-buyers then fed adopted policies of low-interest rates and quantitative easing which favored asset-owning rent seekers over those who work and are rent-payers.
Raise rates. Let markets play-out without government's thumb on the scale. Employment wages will rise and costs will deflate into a more nearly equilibrium balance.
Asset-owner rent seekers will only be able to collect what workers can afford to pay. Workers, now hard-to-replace, will convince employers to both pay higher wages and raise prices to cover cost to do so.
We did see this post-recession time before ... in the late 1980s. Difference is that interest rates remain dangerously low.
1
@reaylward
Fed does seem to be weighing trade-off between asset-values and employment.
Unfortunately, legislators enacted legislation that favored irresponsible asset-buyers then fed adopted policies of low-interest rates and quantitative easing which favored asset-owning rent seekers over those who work and are rent-payers.
Raise rates. Let markets play-out without government's thumb on the scale. Employment wages will rise and costs will deflate into a more nearly equilibrium balance.
Asset-owner rent seekers will only be able to collect what workers can afford to pay. Workers, now hard-to-replace, will convince employers to both pay higher wages and raise prices to cover cost to do so.
We did see this post-recession time before ... in the late 1980s. Difference is that interest rates remain dangerously low.
Additionally, raising rates will mitigate risky behavior. Low interest rates have syphoned off capital that might otherwise be used to create higher-wage US-based jobs. Middle-aged workers have only been able to generate ROI from risky equities ... rather than investing in CDs and banks lending to entrepreneurs. If significant market correction occurs, many will not be financially self-sufficient seniors.
1
The danger here is that the economy weakens at the same time that the massive Trump tax cuts for the wealthy create even higher record peace time deficits. And that leaves the Fed powerless to provide any backstop to the economic and debt decline.
How curious that The Upshot never fails to leave out the role of Trump in this unfolding economic crisis.
47
The other elephant in the room is the Fed balance sheet. They have cut their balance sheet normalization program in half from 30 billion a month to 15. What is their plan for the 3+ trillion in debt given that it was less than a trillion before the last recession? For all the hue and cry about debt, the change in their program seems to be counterintuitive and problematic when the next downturn comes.
8
This is not a new economic theory if you had been reading people like Krugman 10 years ago, or had been familiar with basic Keynesian macro. Although one can quibble about the risks of a bubble the need for the economy to grow, to reinflate, has been long-standing. The issue is that the Fed should not have raised rates in the first place since that was premature. Taking liberties with Krugman, but the idea is that they shouldn't raise rates until well beyond the point of significant inflation, not just the glimmer of it...
16
@James Igoe - To clarify, one shouldn't raise rates in the current economic setting, against what Krugman terms the zero-lower bound. In other times, raising rates is perfectly appropriate and called for.
9