A surprise interest-rate cut by the Federal Reserve could be its best decision, says cabaum1
Five months ago, the Federal Reserve invoked “patience” to talk the stock market off the ledge. In the intervening months, that patience has been tested by a downshift in economic growth, both here and abroad; chronic, below-target inflation; and signs that a trade war is hurting business confidence.
In terms of the taboo against surprising markets, what’s so bad about a good surprise? Isn’t a surprise an effective way to get the biggest bang for one’s buck? “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion,” Powell said in opening remarks at the June 4-5 Conference on Monetary Policy Strategy, Tools and Communications Practices.
What’s more, they are reluctant to front-run the G-20 meeting later this month and the remote possibility of a resolution of the U.S.-China trade war. And, of course, there was Friday’s better-than-expected news on retail sales and industrial production to remove any sense of urgency. Transparency is almost always a good policy, with a few exceptions. For central banks, that means having clearly defined goals or mandates and outlining their reaction function, something that the Fed has yet to clarify except in vague terms.
The Fed should focus on doing the right thing at the right time, even if it means forgoing advance preparation. Nor should policy makers refrain from cutting rates for fear of appearing political in the face of President Donald Trump’s increasingly frequent criticism of the Fed.
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