Earth to Federal Reserve--- It is not prudent monetary policy to lower official rates by 50 basis points despite robust job growth, full employment, above-trend growth, above-target inflation, and soaring asset prices. The decision to delay rate hikes when inflation was on the rise and then reduce rates prematurely could be considered a (big) mistake.
Policymakers are striving to determine the neutral interest rate, R*, that neither spurs nor hampers growth.
However, setting monetary policy should primarily rely on the economy's actual performance (such as concrete data on employment, growth, inflation, and asset prices) rather than an academic framework that may not be practical or reliable in real-world situations.
The strong performance of the economy, coupled with the rising real and financial asset prices, indicates that the real neutral interest rate is significantly higher than what the Fed models or believes, as well as higher than the current market interest rate.
The Fed did not cut rates 50 bps to “spur the economy”, they cut 50 Bps because the treasury cannot afford to pay over 5%. We are in a sovereign debt crisis. It ends with a weaker currency and inflation.
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