The Federal Reserve Board supposedly has a dual mandate–keep inflation low and keep employment low. It does this largely by attempting to manipulate interest rates, primarily the interest rate it charges banks in regard to certain reserves. The financial system is very complex and the exact mechanics of how this all works are almost impenetrable. And it isn’t clear that the FRB understands all the consequences and implications of its actions. Inflation went wild because so much money was pumped into the US economy that demand exceeded supply, exacerbated somewhat by supply chain issues. But it basically was too much money chasing a limited supply of items. Sellers saw an opportunity that had not occurred for decades to set large price increases. Workers selling their labor similarly found the environment ripe for bigger pay rises. Now supposedly the FRB thinks that inflation is under control, despite the government still pumping money into the economy, in the form of a $2 trillion federal deficit. The labor market remains tight, largely reflecting a lot of people who simply don’t want to work and are facilitated by government handouts. Illegal immigrants have been the source of all employment growth and have powered much of the economic growth over the last two years.
A basis point is 1/100 of a percent, so a 50 basis point cut in interest rates is .5%. There was uncertainty prior to the meeting about whether the Fed might cut by .25% or .5%. I don’t know why they are cutting rates at all. It is hard as heck to figure out what the FRB was thinking and Chairman Powell’s statements were opaque and ambivalent. Most of these people are Democrats, so they can claim to be non-political in their decisions all they want, but we know with Dems everything is political. The size of the cut would normally suggest some alarm about the state of the economy and a desire to goose it along. But we are constantly told that Bidenomics is the 8th wonder of the world, so how could the economy be weak? Certainly the labor market statistics, at least those fake ones put out by the Bureau of Labor Statistics, don’t suggest any struggles in the employment arena.
Aside from the political motivation for the larger cut, I think the most likely explanation is that the Fed is horrified at the size of the federal budget deficity and the implications for the massive US debt pile. With interest costs soaring, the Fed is hoping it can reduce the interest rates on sales of new federal debt. I don’t think it can. I think buyers are also horrified and that inflation and repayment risk concerns will keep the rates high regardless of what the Federal Reserve does. And that is reflected in the reaction in US debt rates after the Fed decision. Did those rates go down? No, they did not, they went up. So the Fed, as it often has been lately, is dead wrong in the impact of its decisions.
