Cutting against the grain
Fed decision will lower cost of borrowing
ORDINARILY, THE FEDERAL RESERVE doesn’t cut interest rates when the economy is going gangbusters, but that’s what happened yesterday.
The cut, which brings the rate to between 2 and 2.25 percent, was the first since 2008 when the central bank repeatedly dropped it from 3.5 percent to near zero in an attempt to boost lending in the depths of the Great Recession.
The interest rates set by the Fed have downstream effects on auto loans, mortgages, student loans, business loans – pretty much all manner of borrowing undertaken to build lives and businesses. It’s dry stuff, but it can make a big difference for individuals and the economy as a whole.
The Fed cloisters its decisions from public view and makes pains to insulate itself from political considerations, but President Donald Trump has been banging the drum for the Fed to lower rates to further juice the market.
In a news conference Wednesday, Powell said the cut is “intended to ensure against downside risks from weak global growth and trade tensions,” according to The New York Times, which reported that market players and Trump had been hoping for a bigger cut in the rates.
Trump famously launched a trade war with China, the world’s second-largest economy, and he has also sparked trade skirmishes, imposing tariffs on smaller countries, including allies. The president has celebrated China’s lagging growth, attributing its economic troubles to his tariffs and seemingly ignoring the effect a weak Chinese economy would have on business here.
The glee over the import taxes imposed on Chinese goods seems to stem from Trump’s stubborn assertion that Chinese companies bear the cost of those tariffs. It’s true that Chinese companies suffer from the higher price of their products sold in the United States, but American consumers pay the import taxes.
Nevertheless, the Trump administration acknowledges the trade war with China has caused some financial distress, which is why the federal government is doling out billions of dollars to farmers bearing the brunt of new market barriers.
While Trump has unilaterally raised taxes on products imported into the United States, less than two years ago he signed into law a roughly $1.5 trillion tax cut that slashed the corporate rate from 35 percent to 21 percent. While ballooning the federal deficit, that federal tax cut was projected to stoke a national economy that was already enjoying long-term robust growth coming out of the recession. The Tax Policy Center projected the tax cut law would increase federal debt and also increase gross domestic product.While GDP dropped a bit earlier this year, the economy is still growing and the national unemployment rate stands at a historic low of 3.7 percent. The Times suggested those factors, along with a nascent rise in wages, may be why Eric Rosengren, the president of the Boston Fed, and Esther George, the president of the Kansas City Fed, both opposed Powell’s decision to drop rates.
In Massachusetts, economists might feel even more cognitive dissonance than their counterparts around the country. Cuts to the Fed rate are typically made to keep economic activity humming during rough patches, but the Bay State’s unemployment rate is 3 percent, and on Wednesday Gov. Charlie Baker agreed to all of the spending included in the more than $43 billion state budget – even the $600 million added late in the game.