Fathom Consulting's Brian Davidson worries about the wisdom of a pre-emptive Fed rate cut. But then he decides to chill out, with apologies to Bob Marley

Fathom Consulting's Brian Davidson worries about the wisdom of a pre-emptive Fed rate cut. But then he decides to chill out, with apologies to Bob Marley

This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission


When the Fed meets later this month, it is now widely expected to cut interest rates

Inflation has remained sluggish and there are signs that the economy is slowing, but cutting rates at the first signs of danger seems strange: not only are pre-emptive cuts rare, but the unemployment rate is below most estimates of the natural rate, and on a downward trend. The economy is operating above capacity, and a cut would reinforce the view that the Fed is pandering to the markets, and the President.

What powder left to use when the economy really hits the rocks?

Mr Powell seems to have backed himself into a corner, and there is no easy way out.

But in a temporary cessation of analysis, criticisms and inquests, in this Friday afternoon blog post I propose that we all chill out – investors, central bankers and economists.

I’ve drawn a little inspiration from Bob Marley’s No woman, no cry, while putting a little personal spin on the lyrics.

No rate cut, no cry
No rate cut, no cry
No rate cut, no cry
No rate cut, no cry

Said – said – said I remember when interest rates used to be
Above five percent post recessions

Oba – observing the hypocrites
As they would try to buy the independent Fed

Good companies we had, oh, good companies we lost
It’s called creative destruction

And with r* so low it’s easy to forget the past
So dry your tears, I say

And no rate cut, no cry
No rate cut, no cry

Investors, central bankers, don’t shed no tears
No rate cut, no cry

Said – said – said I remember when interest rates used to be
Above five percent during recessions

And Paul Volcker would make those rates tight
Causing emerging market capital flight (flight)

But over the years, something went wrong
And so I’m telling you (you)

You see, those rates, they aren’t the only thing
So Powell should take a chill pill

‘Cos if he stays on hold-a baby:

Everything’s gonna be all right!
Everything’s gonna be all right!
Everything’s gonna be all right-a!
Everything’s gonna be all right!
Everything’s gonna be all right – yeah!
Everything’s gonna be all right!
Everything’s gonna be all right-a!
Everything’s gonna be all right!

No rate cut, no cry
50 basis points? No, no rate cut, no cry

Hey politicians, try something else
No rate cut, no cry


Brian Davidson is a senior economist at Fathom Consulting in London, England. This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission

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The Jamaican Inflation targeting campaign

https://youtu.be/wtQAkWjyuDg

Inflation has remained sluggish and there are signs that the economy is slowing, but cutting rates at the first signs of danger seems strange: not only are pre-emptive cuts rare, but the unemployment rate is below most estimates of the natural rate, and on a downward trend.

LOL - Everything’s [not] gonna be all right!:

Our current estimates of r-star in the United States are around half a percent. That’s actually now lower than at any time before the Great Recession.2 We’ve seen similar declines in r-star in other advanced economies, including in Japan and the euro area. Link

No wonder FRBNY officials walked back this fellow's interpretation of reality so quickly. All previous Fed "stimulus" actions were rendered null and void.

Is it a concern, a fundamental one certainly, that a long period of very low interest rates might impact negatively as far as

Businesses have already borrowed as much as they might need, to expand and employ more. Are they now being encouraged to over commit by borrowing more than they need just because they can.

Homeowners are upgrading homes or moving upmarket or simply borrowing against existing equity to spend elsewhere, just because they can.

Prospective new homeowners unable to achieve effective returns on savings invested towards a deposit.

Retirees, pensioners already have had the return from their life savings severely depleted. Does this mean, less heating of the home, less healthy diet, less doctors visits simply because they can’t. Does that mean more sickness burdening our health system etc.

Apart from the above, it would seem obvious that the positives to be expected from interest cuts, all of them over more than five years now, have done their dash. So what about something novel like the tax cuts National had foreshadowed? But of course this is a Labour government, put the chewing gum back on the shelf, and go wash your mouth out.

Possibly the most useless and facile article ever posted on interest.co.nz... and that is acknowledging the regular tripe served up by Roger Kerr.