Fed Rate Cuts Won’t Stimulate Investments or Growth
On Wednesday, the Wall Street-owned and controlled Federal Reserve cut the benchmark fed funds rate by a quarter point as expected.
It’s now at a range between 2 – 2.25%, the move signaled well in advance, likely more than a mislabeled “mid-cycle adjustment.”
More cuts are likely coming, easy money the order of the times since the Greenspan Fed, notably during helicopter Ben Bernanke’s tenure as chairman.
He, his predecessor, and successor notoriously dropped mney on Wall Street, not on main street where it’s badly needed.
Fed policy is all about benefitting speculators and other monied interests at the expense of savers and others on fixed incomes, especially retired individuals no longer gainfully employed.
The Fed also announced that it’s “conclud(ing) the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.”
It means drawing down the Fed’s nearly $4 trillion asset portfolio ended for the foreseeable future. Resumption of money printing madness quantitative easing is likely coming in the weeks and months ahead.
QE is smoke with no fire. Bernanke knew it didn’t work but pretended otherwise. Fed economists Seth Carpenter and Selva Demiralp earlier explained the following:
“In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level.”
“Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found.”
“The argument against the textbook money multiplier is not new. For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if banks have access to external sources of funding.”
Boosting aggregate demand requires putting money in the pockets of ordinary people who’ll spend it for essentials and discretionary things.
Dropping money on Wall Street through near-zero interest rates and QE boosts asset valuations to bubble levels.
Commenting on Wednesday’s rate cut, economist John Williams said the following:
“US economic activity continues to deteriorate and holds well below the FOMC’s formal assessment of current or forecasts of pending conditions.”
Williams believes a “new recession remains in play, as supported by underlying detail in the July 26th GDP reporting and related GDP benchmark revisions.”
Weeks ahead of the move, David Stockman slammed the notion of Fed rate cuts despite ongoing Sino/US trade war with no near-term prospect for resolution.
Since 2008, a decade of easy money pumped around $4.6 trillion into the marketplace, facilitating speculation, stock buybacks by corporations, high executive pay and bonuses, along with mergers and acquisitions.
Fed policy elevated equity valuations to bubble levels — while ordinary Americans got force-fed austerity, along with high unacknowledged unemployment, most other US workers way under-employed on low-pay, part-time or temp jobs with few or no benefits.
How much lower US interest rates will go remains to unfold. Europe is experimenting with negative rates.
Is the same thing coming to America, requiring savers to pay banks or other financial institutions to hold their funds?
Easy money created an enormous debt overhang. When push comes to shove, what can’t be repaid won’t be.
The US and Europe are heading toward becoming more thirdworldized than already — while speculators and high-net worth individuals feast on the Fed’s largesse.
Stockman asked “(w)hat is the catalyst that is finally going to trigger the huge correction that’s implicit in what the Fed is doing?”
Debunking monetary easing, he said “(t)he idea that the Fed is going to cut rates after 10 years on the zero bound practically is totally nuts. It won’t stop a recession because we’re at peak debt.”
He called Trump “an unhinged protectionist, nationalist advocate for trade policies that will eventually disrupt the entire global economy (and) bring on the recession that’s around the corner.”
Unsustainable US debt makes it “only a matter of time before we run out of luck on policy.”
Two Fed governors opposed Wednesday’s cut, not warranted by economic data, they said.
Wanting a more aggressive cut, Trump slammed Powell, tweeting: “What the market (meaning speculators) wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle. As usual, Powell let us down.”
A Fed statement said the following in part. “(T)he labor market remains strong and…economic activity has been rising at a moderate rate.”
“In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 2 to 2-1/4 percent.”
“This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.”
“Uncertainties” always exist. Given the Fed’s positive assessment of economic conditions with interest rates near-rock bottom, why was the fed funds rate lowered at this time?
What benefits speculators harms most Americans. In mid-July, noted investor Jim Rogers warned of a “terrible” bear market ahead, saying:
“Later, this year or next year when the economies around the world are getting bad, Mr. Trump is going to blame everything on the foreigners, the Chinese, the Germans, the Japanese, everybody, and then the trade war will come back and then it’s all over…It’s going to be terrible.”
The Fed is Wall Street “dependent,” market “dependent,” speculators “dependent,” not “data dependent” when unjustifiably cutting rates and going too low — its easy money and lots of it failing to stimulate investments and economic growth.
Since reaching near-zero in 2008, the fed funds rate was raised to a high of 2.375 last December.
Wednesday’s cut headed rates south, likely a reverse trip to zero or perhaps this time below it — main street be damned.
My newest book as editor and contributor is titled “Flashpoint in Ukraine: How the US Drive for Hegemony Risks WW III.”