Rate cuts won't work.
Or so says LendingTree's Chief Economist Tendayi Kapfidze.
The Federal Reserve is almost 100% certain to cut the federal funds interest rate in an effort to stimulate what some would call a "peakish" U.S. economy.
But "I actually don't think even the rate cut we're getting on Wednesday is as necessary or needed for the economy," Kapfidze said. There's a lot of data showing that the economy is growing above trend. And I think the things they're trying to fight with this rate cut are not appropriate for monetary policy to be fighting -- namely the trade war, inducing a decrease in confidence among corporate CEOs."
Let's unpack this.
First off, GDP growth in the U.S. came in at 2.1%, beating estimates a few days ago, which is "above trend," as Kapfidze noted. Secondly, in addition to rate cuts maybe being inappropriate right now, he said:
"The eurozone and the Japanese's central banks are ineffective right? At this point. The things they've been doing for years to try to stimulate their economies have not been working. Now we're not close to there, but this kind of action where we're doing a rate cut for items that are not necessarily well addressed by monetary policy, that's a step toward it. And that's what concerns me."
Now let's unpack that.
Not one developed country has had strong GDP growth -- historically speaking -- since the financial crisis, which preceded the Great Recession. Quantitative easing in the Eurozone and unprecedentedly low interest rates in the U.S. may have helped spur the level of growth there has been in the recovery, but the growth has certainly been weak during this long expansion.
The 10-year treasury yield never got above roughly 3.1% in the U.S. during the expansion, because inflation was low. Yields certainly never reached that level in the even lower-inflation European Union. Now, some rates are negative in the E.U.
Maybe monetary stimulus just isn't working so well, Kapfidze argues.