The Federal Reserve will cut interest rates enough to keep the struggling economy from slipping into a recession this year, economic forecasters say.
Yes, that seems to be the standard line you hear - mostly from Wall Street economists whose interests are tied to keeping the markets up. Most of us know, however, that economists have a miserable record for forecasting turns in the economy. They are practically the perfect contrary indicator at the turns.
Let's not forget that the Fed's powers to revive a slowing economy are not nearly as effective as its powers to slow a robust one. There are two points I would argue with those economists who think that the Fed has assured us that we won't fall into recession.
First, the Fed Funds has barely reached the level where it can be considered stimulative. In fact, it's possible that we are still at a neutral level and won't be at a stimulative level until we drop below 4%. Given the lag inherent in monetary policy, it is only then that the clock will begin ticking on when the recovery will begin. A really aggressive level wouldn't be reached until the Fed Funds rate is below the rate of inflation.
Second, the targets of Federal Reserve easing are not likely to respond in earnest to lower interest rates. You often hear that consumers will be helped by lower rates. Most of consumer's debt is in the form of mortgages, which were being refinanced at a healthy rate recently. But now mortgage rates are considerably off their lows and this avenue of putting money in consumer's pockets is ending rather than beginning - barring a resumption of the decline in long rates. Lower short-term rates will help somewhat if they translate into lower rates on consumer debt, but consumer debt is high and further increases in spending are unlikely from these levels. And there is another side to lower rates that doesn't get mentioned. There is a lot of income that is going to be cut due to lower CD and money-market rates. This will mitigate the spending boost that could be expected due to lower interest rates.
As for businesses - they will be helped as their interest payments come down. This will lessen the interest expense and boost the bottom line. Unfortunately, the bottom line is being impacted by a rising labor costs - a much larger item - and profits aren't likely to be helped much at this time. Without rising profits, the odds that business will increase its investment in plant and equipment are slim, especially given the large excess capacity already present.
For economists to be so casual about the U.S. economy at this time, appears to me to be a good example of whistling past the graveyard. |
