Federal Reserve’s Decision to Cut Interest Rates by 50 Basis Points: Risks and Benefits
The Federal Reserve recently made the decision to cut interest rates by 50 basis points. While this move aims to stimulate the economy, there are both risks and benefits to consider. Historically, such actions often lead to inflation and a subsequent recession, making the current decision particularly concerning.
Risks of the Interest Rate Cut
The risks associated with this interest rate decision are significant and multifaceted. Firstly, the timing of the cut is particularly harmful. The Fed has been slow to respond to the rising inflation, and a half-percentage point reduction is simply not enough to address the underlying issues.
Furthermore, the decision to cut rates now could accelerate the onset of a recession. As it became evident that inflation was rising, the Fed’s failure to act promptly has led to a situation where the economy is facing multiple pressures. The stock market, already shaky, is experiencing a decline as thousands of jobs are being lost, with many companies going bankrupt or cutting back due to the high debt levels.
Decrease in the Cost of Borrowing
One potential benefit of the interest rate cut is the reduction in the cost of borrowing, which could include mortgages. This measure is likely to provide some relief to consumers and corporations. However, for the current political context, this move benefits the Biden administration and Mrs. Harris, as it could positively impact opinion polls in the short term.
The Political Context and Timing
The decision to cut rates under a Biden-Harris administration appears to be a strategic move designed to benefit the incumbent president. Trump, on the other hand, can be expected to complain about Biden controlling the Fed. The timing of the announcement before an election highlights the political motives behind this decision.
Still, numerous economic indicators suggest that the US and much of the world is experiencing a slow recovery, if any, from the 2008 recession. Worker wages have not increased during this period of growth, and the unemployment statistic is misleading, as it includes people working just one hour a week or those who have given up looking for jobs. Corporate profits are increasing, but this growth is driven by rising costs and debt.
The Underlying Economic Issues
Trump’s economic plan relies heavily on tax cuts for corporations and the wealthy, coupled with a massive economic stimulus. Although this initially had a positive impact, the effects are now waning, leading Trump to pressure the Fed to lower interest rates. However, the Fed lacks the tools to manage the economy effectively, relying on quantitative easing (QE), which involves buying assets from banks and corporations.
The current low interest rates and ongoing QE are delaying the inevitable economic downturn, but at a cost. The Fed’s actions are creating a false sense of economic growth, which could lead to a speedy loss of the US's status as the world's reserve currency. This situation could result in true consumer inflation and a decline in the value of the dollar.
Conclusion
The Federal Reserve’s decision to cut interest rates by 50 basis points in the current context is more about political strategy than economic necessity. While it might provide temporary relief and benefit the Biden administration in the short term, it risks exacerbating the underlying economic issues and potentially leading to a recession and a broader economic crisis.
As of this writing, the signs are clear that a recession is on the horizon, and the political and economic environment is ripe for a significant realignment. Investors and policymakers should be prepared for a complex and challenging period ahead.