Stock market watchers are expecting a rate cut this week because they believe that the U.S. economy is experiencing a slowdown. Second quarter GDP growth was 2.1% which is lower than the 3.1% growth rate during the first quarter. However, consumer spending rose 4.3% despite the fact that tax refunds were smaller than previous years. The GOP tax cuts did increase the weekly take home pay for consumers which accounts for some of the strong spending.
Growth deceleration in the second quarter was due mostly to tariffs and a fear of a global slowdown. China’s economic growth has slumped to its lowest level in nearly three decades due to the prolonged trade war with the United States. However, the biggest drag on the U.S. economy has been a slump in business investment which was down 5.5 percent.
It is hard for corporations to spend money with Trump’s tariff threats on most of its trading partners. The new NAFTA or USMCA hasn’t even been approved by Congress; then add the uncertainty of a smooth Brexit (Britain leaving the European Union) and you a recipe for a slowdown in business spending. In reality the Trump administration is partly to blame for the slump in world economic growth.
In order for the Trump administration to win the trade war they need interest rate cuts in order to lower the value of the U.S. dollar so that their tariffs are more effective. China can easily lower the value of their currency compared to the U.S. because the Federal Reserve is an independent agency.
Why I believe that lowering U.S. interest rates is a bad idea!
- Trump has relentlessly used social media to criticize the Fed. To remain independent, the Fed has to resist political pressure.
- Unemployment is at the lowest level in decades; the economy doesn’t need more stimulus.
- Lowering interest rates will enable Trump to pursue a more aggressive use of tariffs which in turn will further slow world economic growth.
- Cheap money will allow corporations to buy back more of their shares adding debt to their balance sheet.
- Low interest rates will encourage more wasteful government spending, adding to the already large national debt.
- Pension plans will get less interest on fixed income investments making it more difficult to meet their monthly commitments.
- Consumers will get less interest on their savings accounts.
Conclusion: Cutting interest rates could make matters worse. It could prolong the trade war with China and enable the Trump administration to actually follow through with threats of imposing more tariffs on their other trading partners.