In the face of the trade-driven headwinds, some economists question how potent the expected Fed rate reductions will be, arguing that lower borrowing costs won’t induce businesses spooked by tariffs into stepping up their spending.
“The biggest drag on investment is uncertainty stemming from the U.S.’s erratic trade policy — something the Fed is powerless to address,” Megan Greene, incoming senior fellow at the Harvard Kennedy School, said in an e-mail.
San Francisco Fed President Mary Daly pushed back against that line of reasoning in a Bloomberg Television interview last week.
“Businesses do respond to the sense that the economy is going to be on a sustainable pace or it’s going to falter,” she said. “That mood shift can be very much supported by the actions of monetary policy.”
A big advantage of the widely expected rate reductions may actually be defensive. Without them, financial markets could crater, dragging down economic growth.
“The main benefits of the Fed cutting right now is to prevent another stock market correction like we had in the fourth quarter,” said Ethan Harris, head of global economics research at Bank of America Corp.
In a sense, it’s a perverse version of the so-called Greenspan put — the belief among investors that former Fed Chairman Alan Greenspan would ride to the rescue whenever markets dropped precipitously. In this case, investors are betting on Powell to prevent a plunge from even happening.
The expansion does have some things going for it. Partly because it’s been so lackluster, it has not built up some of the excesses that typically precede downturns — a bubble in house prices and home construction in 2007 and a run-up in stock prices and business investment in 2001. And inflation has remained muted.
It was in 1997 that the late Massachusetts Institute of Technology economist Rudiger Dornbusch fingered the Fed as the culprit for killing off growth.
“None of the U.S. expansions of the past 40 years died in bed of old age,” he quipped. “Every one was murdered by the Federal Reserve.”