If you ask Robert Shiller, cutting rates when the economy doesn’t need rate cuts is a risky proposition.
His rationale is simple. “It shows a sense of alarm”, he remarked on Tuesday.
Shiller spoke to CNBC and essentially echoed concerns voiced on Friday by Richard Curtin, director of the University of Michigan consumer survey, who warned that “the main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession”.
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“The important thing is the narrative that they’re beginning. So when [investors] saw the rate cut for the first time in years, the 25 basis points doesn’t mean that much, it’s more that they launched a new regime and that they’re worried about a recession”, Shiller went on to say.
This is a blindingly obvious point, but it’s apparently lost on the Trump administration, or at least on Trump himself, who not only continues to pressure the Fed into pro-cyclical rate cuts, but insists on shouting about it to 65 million people on Twitter. Jerome Powell is now a household name.
Over the past week, this same criticism of the July rate cut has come up again and again, and now, leaks from the White House regarding the formulation of a possible “contingency plan” to avert a downturn have made things worse.
On Monday, during remarks to Bloomberg Television, Boston Fed chief Eric Rosengren appeared to allude to the same risk when he told Kathleen Hays that “we have to be careful not to ease too much when we don’t have significant problems”.
If consumers get the idea that a recession is just around the corner, they may retrench, dealing a blow to an economy that lives and dies by consumer spending. That’s what Shiller warned about on Tuesday.
But hey, what does a Nobel prize winner know that Donald Trump doesn’t, right?