A current article in The Economist mentioned what they assume is the president-elect’s view of rates of interest:
A extra hawkish Fed could, in flip, invite the wrath of Mr Trump, who has insisted that, as president, he ought to have a say over rates of interest. He will certainly wish to see steeper charge cuts now that he’s in cost.
This jogs my memory of a narrative entitled The Monkey’s Paw, the place the protagonist is granted three needs, which don’t end up in addition to supposed. Let’s think about some doable outcomes, after which consider the kind of rate of interest path that Donald Trump ought to desire.
1. In most events, steep rate of interest cuts are related to recessions. Latest examples occurred in 2020, 2008, and 2001. Recessions are unpopular.
2. One would possibly argue that The Economist meant that Trump prefers a steep decline in rates of interest mixed with a powerful financial system. And the financial system at the moment does seem fairly robust, with the Atlanta Fed forecasting 3.3% progress in This fall. However there’s a substantial threat {that a} steep minimize beneath that situation might set off excessive inflation. In the intervening time, the fed funds futures market is predicting some charge cuts over the subsequent few months, however at a much less steep charge of decline than we’ve seen in current months. On the identical time, market inflation expectations are barely above goal. If the Fed had been to undertake even “steeper charge cuts” than seen within the current previous, regardless of the sturdy NGDP progress, there can be a really actual threat of inflation re-accelerating. Inflation is unpopular.
3. Maybe the Fed charge goal remains to be far above equilibrium. (However then why is progress so robust?) Maybe it is going to be doable to chop charges and preserve the growth going, as we noticed in 2019 and 1998. However we’ve already seen a 75-basis level minimize. It might be nearly unprecedented to see a good steeper minimize from this level ahead, with out both re-igniting inflation or being a response to recession.
To be clear, I’m not saying that we’re prone to get a recession or excessive inflation. However that’s as a result of I don’t count on to see even steeper charge cuts. I count on the tempo of charge cuts will truly sluggish in 2025. And I imagine this may be the very best end result. Certainly I’ll go even additional. If these three eventualities had been absolutely defined to Trump, I doubt he’d be rooting for “steeper charge cuts”, particularly if he had lately learn The Monkey’s Paw.
Or Goldilocks and the Three Bears.
That is an illustration from The Monkey’s Paw:
