Federal Reserve Expected To Cut Interest Rates
STEVE INSKEEP, HOST:
Later today, the Federal Reserve will likely cut interest rates. It's a move the Fed normally makes when the economy is slow or crashing. So why make this move after a decade of economic growth? David Wessel is with us next. He is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. David, good morning.
DAVID WESSEL: Good morning, Steve.
INSKEEP: I got to note the Fed just raised rates in December, which is the kind of move you would expect. Why do they go the other way now?
WESSEL: Right. I mean, not only did they raise rates in December, but they suggested they want to keep raising rates this year. And now they're doing the opposite. I think there are at least three reasons.
One is the Fed is implicitly saying that it made a mistake in December. The economy's doing OK now, but the Fed thought it would be doing even better. I mean, consumer spending has been pretty good. Wages are rising a little bit, finally. But manufacturing is weak. Housing isn't doing as well as you'd expect with mortgage rates low. And business investment is particularly disappointing. Second, the Fed expected inflation to be moving convincingly up to its 2% target, and it hasn't. And they want to be sure that inflation and, importantly, public and market expectations of inflation don't slide down towards zero.
And third, I mean, as they look ahead, which is what they have to do, there are a lot of things to worry about out there. From China to Europe, the rest of the world's economies are slowing down, some of them precipitously. That has negative effects on us. And President Trump's trade war is hurting U.S. exports and, I think, depressing business sentiment and business willingness to invest. So in a sense, they're taking out insurance against a really bad outcome even though right now the economy feels pretty good.
INSKEEP: Taking out insurance against the president. And yet, they are doing with interest rates exactly what the president wants. He's been complaining constantly about the Fed for quite some time. And he said again what he wanted yesterday.
(SOUNDBITE OF ARCHIVED RECORDING)
PRESIDENT DONALD TRUMP: I would like to see a large cut. And I'd like to see immediately the quantitative tightening stop. It should be stopped. For them to have done quantitative tightening and also higher interest rates simultaneously, I think, was a big mistake.
INSKEEP: OK. I'd like to see a large cut in interest rates. Now, the Fed seems poised to go ahead with roughly what the president has been demanding on interest rates anyway. Is there any evidence to suggest the Fed is just doing what the president demanded to rev up the economy right before an election - just to put it out there in the most blunt way?
WESSEL: Yeah. Well, I don't think so, but I know that a lot of people will assume that's happening. And there's, like, no way for the Fed to escape the implication that they're succumbing to the pressure from the Fed. Think what - the way that people at the Fed talk about it is our job is to keep the economy humming with low and stable inflation. And that means that sometimes we have to cut interest rates to protect the economy when there are disturbances, even if those disturbances are created by the president or the Congress.
So in a sense, he's creating the conditions or helping to create the conditions that lead them to think that a rate cut is necessary. But I think they're very determined to say, we're doing it because this is our reading of the economy, not because we've been reading the President's tweets. And a lot of people won't believe them.
INSKEEP: Why is the president focused not only on interest rates but on the strength of the U.S. dollar relative to other currencies?
WESSEL: Well, the dollar has been pretty strong lately. And the president worries about that because he understands that when the dollar goes up, that hurts our exports, makes them more expensive for foreign customers. And that makes the trade deficit wider, and he worries about the trade deficit. Now, you'd expect a rising dollar when the U.S. economy is doing better than other economies, and that's the case now. But part of what's going on is other countries are cutting interest rates. And as they cut their interest rates, that tends to pull their currency down against ours. And so the Fed has to keep up with them.
So there - he's got a point there that interest rates have something to do in exchange rates. And if the Fed doesn't cut interest rates today and doesn't signal they're going to do more, then the dollar will be strong. And that'll hurt the trade deficit, which he cares about.
INSKEEP: David, you mentioned that the experts at the Fed now think they made a mistake to raise interest rates. Even a decade into an economic expansion, too early to raise interest rates, is what they're finding out. Are we learning that the economy has fundamentally changed from what people thought it was and how people thought it worked?
WESSEL: Yes, I think we are. I mean, interest rates around the world - not only the ones that the Fed and the European Central Bank and the Bank of Japan set, the short-term rates - but the longer term rates set in the bond markets are very low by historical standards, partly because we don't have very much inflation. But it's also worrisome. It's a sign that the outlook for the global economy and growth is distressingly poor.
And it has a number of implications. One of them is that it's going to be much harder for the Fed to fight the next recession because they won't have very much margin to cut interest rates. They usually cut them about 4 percentage points. It's only at 2 1/2% now.
INSKEEP: David, thanks so much.
WESSEL: You're welcome.
INSKEEP: David Wessel of the Brookings Institution. Transcript provided by NPR, Copyright NPR.