The economy is growing strong. Unemployment is near historic lows. Yet President Donald Trump on Tuesday called on the Federal Reserve to slash interest rates by a whole percentage point to boost American growth.
That would be a huge rate cut. The last time the Fed cut rates that much was December 2008, in midst of the the deepest financial crisis since the Great Depression. The central bank slashed rates from 1% to essentially zero at the end of 2008. It had never done anything like that before.
That’s just the point. Central banks in the developed world don’t tend to slash interest rates by a magnitude like 100 basis points just to stimulate some additional growth — it takes a crisis to perform an emergency cut of that magnitude.
In emerging markets, larger movements in rates are much more common, because central banks have to tackle the likes of consumer price inflation or the valuation of the local currency.
But America is no emerging market.
Trump’s comments come just days after growth in first-quarter GDP — the broadest measure of the US economy — steamrolled expectations at 3.2%. The comments come less than 24 hours before the Fed’s interest rate update, due at 2 pm ET on Wednesday.
Trump’s attacks on the Fed’s policies aren’t new anymore. But they continue to worry investors about the central bank’s independence, which is not a typical concern in the developed world.
The president has also called for rate cuts before. But 1% is a whole new ballgame.
Last week, White House economic adviser Larry Kudlow said that weak personal consumption inflation, a part of the GDP report, could lead the Fed to cut rates in the near term. The PCE index sat at 1.4% in the first quarter, compared with the central bank’s target of 2%.
But many are puzzled by that suggestion. With a very tight labor market and growth far above its peers, most economists say the United States simply does not need stimulus. Cutting rates now would also take away weapons in the Fed’s arsenal in the event of an economic downturn, when the Fed typically lowers interest rates to increase borrowing and economic activity.
One way or another, Fed Chairman Jerome Powell will probably be grilled on the rate cut issue during his press conference after Wednesday’s policy update. In the past, Powell has said he will not let politics get in the way of the Fed’s rate-setting decisions.
