For the past three years, the Fed has jacked interest rates skyward. That’s a bad idea, and the central bank should actually be lowering them, say some Wall Street savants.
When the Federal Reserve announced Wednesday that it likely wasn’t going to raise interest rates further this year, the critics argued that the Fed’s staying on hold wasn’t enough—and that it should reduce rates, by at least a quarter-point.
Advocates of doing a 180 on the Fed’s tightening policy fear that the US economy is on shaky footing, and that higher rates are the equivalent of the 18th century practice of bleeding a sick person—that the cure indeed will kill the patient.
“The last hike was a mistake,” said Bob Browne, CIO of Northern Trust, referring to December’s 0.25 point increase, the most recent in a series of nine that began in late 2015. “Why don’t we reverse the mistake?”
At the outset of the Fed’s tightening campaign, the expectation was that a strengthening economy would produce upward price pressure. That didn’t happen. Inflation remains stubbornly below the 2% annual level that the Fed deems healthy for the economy. (It nosed above that level last year, then retreated). The Consumer Price Index was up 1.5% as of February, compared to the 12 months prior.
Meanwhile, unsettling signs of a weakening economy have cropped up. Job growth, retail sales, and business investment stats are disappointing lately. The Fed’s median projection for 2019 economic growth has slipped to 2.1% from 2.5% in September.
In the view of Narayana Kocherlakota, an economics professor at the University of Rochester and former president of the Federal Reserve Bank of Minneapolis, “the Fed should be considering more stimulus for a US economy that has long failed to meet its goals for employment and inflation.”
“With a potential slowdown coming in both US inflation and global growth, that means thinking about lowering interest rates,” Kocherlakota wrote in Bloomberg Opinion.
To former banker Frances Coppola, writing in Forbes, “The Fed has not given an adequate explanation for the pace of interest rate rises last year, which appeared unjustified in terms either of the Fed’s mandate or key economic indicators.”
“The Fed should be proactive and not reactive,” Northern Trust’s Browne said. The road ahead looks sufficiently bumpy that he believes the central bank should act now, instead of waiting until things get rough.Investor expectations on rates have swung quickly from hawkish to dovish. According to the CME Group’s fed funds futures, investors believe short-term rates will stay unchanged this year, by 62%, with 30.1% expecting a one quarter-point easing, and 6.2% looking for two reductions. That’s a big change from just last December, when 75% thought there would be at least one hike, 22% foresaw rates not to change, and 3% saw rates lowered once.