Cogito Ergo Non Serviam
Fed Cuts Rates 25 BP
The Federal Reserve cut the US Federal Funds Rate 25 basis points yesterday to a range of 3.5-3.75%. Three Fed governors dissented from the decision. Stephan Miran, a Trumpist, wanted a 50 bp cut to boost job growth. Austen Goolsbee and Jeffrey Schmid, two competent economists, wanted to hold rates steady to keep inflation in check. As this journal has said repeatedly, the Fed is attacking the stagflation under which America suffers by trying to boost the job market first and addressing inflation later. That is probably backwards, but the economy does not care. Voters do, however.
When stagflation was last a problem for the US, it was much worse. In the 1980s, inflation peaked at around 20%, and the jobless rate reached 10.8%. The Fed under Paul Volcker raised rates first to squeeze inflation, which declined from June 1981 onward. Unemployment rose before rates changed to bring it down starting in December 1982. The mid-terms in 1982 saw significant Democratic gains.
This time, the stagflation is milder. Unemployment is around 4.4% and inflation is about 3% (figures are squishy because of the government shutdown earlier this autumn). The Fed had decided to prioritize getting the labor market moving again, and as a result, the inflation fight will come later, one supposes.
The political situation is bad for the president. Unemployment affects those without work, by definition. Inflation affects everyone. That means that he will get credit for helping the 1-2% of the people who will get jobs as a result of the rate cuts, and 100% of the people will see prices continue to rise. They will vote accordingly.
Chairman Jerome Powell is not under any illusions that he has fixed things. "The housing market faces some really significant challenges and I don't know that a 25-basis point decline in the federal funds rate is going to make much of a difference for people," Mr. Powell said, adding housing supply in the United States is low and it would be expensive for people who got low-rate mortgages during the pandemic to move.
Others agree. USA Today stated,
"While the Fed's decision aims to prevent further cooling in the job market, Oxford Economics’ Chief Global Economist Ryan Sweet isn't confident the Fed will be able to help the labor market 'because of what ails it.'
"Rate cuts are unlikely to significantly boost the hiring rate, which is being depressed by overhiring, solid productivity growth, policy uncertainty, a rise in people with multiple jobs, and less immigration," Sweet said in a note. "Monetary policy can't solve many of these issues."
The Fed, however,is in charge of monetrary policy only. The federal government could try to fix this with fiscal policy, and it would be vastly more effective. If all the stupid tariffs were canceled, inflation would drop and employment would rise. Alternatively, the tax code could be altered so that the US federal budget were balanced, or even running a surplus. That would take longer, but it would be a structural fix. It would also require tax increases, which are unpalatable to the Republican Party no matter what happens to the national debt. They are not the party of fiscal responsibility, and have not been since Ronald Reagan was elected (he doubled the national debt in his 8 years).
The decline under the Trump administration continues to accelerate.
© Copyright 2025 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
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