The Fed’s Market-Chasing

They’re at it again, or talking like it.

Federal Reserve officials meet Tuesday recognizing they may need to cut interest rates should the economic outlook darken. The question is whether that moment has arrived or if they need more information before deciding.

The choices…are between cutting rates now if they see the economic outlook worsening or holding off and cutting next month if the picture grows darker.

No, the question proceeds from the false premise that the Fed should cut rates, with its partially false alternative that the Fed should hold rates steady for a time.

The Fed is compounding its error:

Policy makers are considering whether their short-term benchmark rate, which has been in a range of 2.25% to 2.5% this year, is curbing economic growth more than they expected, especially if uncertainty over US trade policy chills business investment and weakens corporate profits.

The Fed is chasing the market and moving too far inside the underlying economy’s cycle. There’s no reason for the Fed to cut its benchmark rate, and not yet any reason to hold its rates steady. The Fed’s mandate is to hold prices stable (its second mandate of full employment is a natural outcome of the strong and growing economy that results from stable prices and need not be considered here).  There’s nothing in there about any obligation to take steps to “manage” the economy’s growth; indeed, that’s a political decision from fiscal policy (even assuming an economy should be managed by any aspect of government) and beyond the ken of any central bank.

On the contrary, the Fed has defined a stable price regime as one with 2% inflation, more or less (the particular rate, within limits, is of little importance). Accordingly, the Fed needs to set its benchmark rates at levels consistent with that inflation rate; the Fed isn’t there, yet—hence no rate cuts would be useful. Once arriving at those historic rates, then the Fed should hold them steady, and then (again I say) sit down and be quiet.

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