The presence of political pressures pushing for economic stimulus does not negate the very real factors necessitating a rate cut: economic turbulence (domestic and global) and trade wars.
Notably, as trade, manufacturing, and business investment data have weakened, job growth has slowed. The timing could not be worse, as those that were largely forgotten by the 11 year economic recovery are only just now starting to gain traction. The ongoing trade war, which shows no sign of slowing, will only further handicap job growth. Meanwhile, central banks around the world are cutting their own rates, in the face of greater global stress.
While the above risks do not necessarily indicate a coming recession, cutting rates now will, in Chairman Powell's words, provide a needed "insurance" policy. As Alan Greenspan - who cut rates in July 1995 when the S&P 500 was at a record high and up 20% for the year - recently said, it pays to proactively fend off potential negative economic effects. Moreover, inflation continues to be too low, running 40-50 basis point below the 2% inflation target. This gap not only indicates ample room for movement, but could threaten the economic expansion if it is allowed to persist.
Even assuming that the Fed is actually acting independently and not in direct response to Trump's demands for economic stimulus as a means of shielding the economy from his own policy choices, no one can deny that it at least appears that the President is getting his way. Indeed, there are two hard truths that we must accept from this recent episode: (1) no president has previously so publicly lobbied for a rate cut; and (2) it is highly unusual for the Fed to cut rates during strong expansions. The January 2001 rate cuts preceded the 2002 crash (with the NASDAQ losing 80% and the S&P losing 50%). The rate-cut in the summer of 2007 preceded the crash that cost the S&P 57%.
While it might provide a minor (and likely brief) economic boost, long-term a rate cut will erode credibility in the Fed and undermine one of the U.S.'s most powerful institutions.
In 1971, 61% of U.S. households earned the "middle-tier" of income - i.e., between two-thirds and 2X the median income. By 2015, only 50% were in the middle-tier.
And the middle class is not just smaller, its fortunes have also dwindled in comparison to the upper class. U.S. median household income (adjusted for inflation) is essentially unmoved since the late 1990s, while average home prices have continued to rise. Between 1974 and 2017, workers' share of the national income fell from 64.5% to 56.8%. Between 1979 and 2016, the top quintile of wage earners enjoyed a 27.4% increase in real wages, compared to 3.41% for the middle quintile. Between 1956 and 2016, union membership dropped from 28% of all workers to 10%. And between 2000 and 2019, the labor force participation rate dropped from 67.3% to 62.9%.
The middle class is getting sucked dry.
In fact, the whole notion of a shrinking middle class is a myth. Here's why.
When you compare household incomes over time, you have to look at identical households. The census defines a household as one or more persons living in the same abode. Fifty years ago, only 15% of all U.S. households had a single occupant. By 2017 that percentage had nearly doubled, to 28% percent. In just the last 10 years, the percentage has increased by three points. So, the typical household today is much smaller.
anon Spider
The people are suffering. If the gov't cannot stand up and be there for its people in a time of need, what can we expect of the people in return?
[W]e're just trying to pour too much water in and I wish it were actually true that even a third of the money was going to people who were in poverty. Most of it is not. Most of it is going to the middle of the population and it is going in one shot transfers, not in things that are ultimately going to build and strengthen the economy. And that's why as much as I admire the effort and as much as I admire the progress against poverty, I am worried that the sheer scale is going to crowd out our doing what we need to do to compete with China, to build back better the president's principal aspiration. And I'm very worried that this is going to lead us to difficulty down the road as inflation picks up and the Fed has to respond.
Here is the irony: there is a lot that is good in this program, but I think its advocates try to have it both ways. On the one hand when a concern about inflation is raised, they explain that it is mostly temporary and transient, just a relief program, and really just a special one-year thing. On the other hand, most of the time they are explaining how it is the most fundamental revolution in American policy since the New Deal. And you can't really have it both ways. You can either have long term transformation or you can have temporary action. And what I would have liked to see more, is a program of this scale or larger that was paid for and was focused on investment and contained the necessary relief. This program goes vastly beyond ... what was necessary to provide relief. And it doesn't - with the exception of the childcare/antipoverty thing, which is very important - it doesn't really do much that either represents a revolution in social investment on social policy or a revolutionary investment in the future of our country. And I think that is something we are going to look back on and regret. Not that we didn't do something, but that we weren't more careful and calibrated in the design of what we did.
Larry Summers, debating Paul Krugman on Fareed Zakaria's GPS.
Assumes a Boat