Many investors, businesses, and consumers welcomed the Fed's first rate cut since March 2020. The Fed's 50 basis point rate cut was larger than many Fed watchers had expected, and continued to suggest further rate cuts were on the way.
Lower borrowing costs associated with Fed interest rate cuts could make people more optimistic about the overall economy and their own finances. The rise in consumer sentiment comes as Democratic presidential candidate Vice President Kamala Harris lags Republican candidate former President Donald Trump in terms of which candidate is seen as better on economic issues. may help.
Even before the Fed's rate cut, President Trump and pro-Trump commentators suggested that the rate cut would be a “September surprise” designed to boost Vice President Harris. This claim was dismissed as a baseless “conspiracy theory” by the “mainstream” media. But anyone who knows the Fed's history of adjusting monetary policy to advance political goals would have no problem believing that the Fed would cut interest rates to support its preferred candidates.
Federal Reserve Chairman Jerome Powell has an incentive to prevent President Trump from returning to the Oval Office. While in the White House, President Trump regularly criticized Powell for not further lowering interest rates, which were already historically low.
Trump also indicated that if he wins, he will lobby Congress to give the president a direct role in monetary policy. Vice President Harris, by contrast, has vowed not to interfere with the Fed's monetary policy operations. It's easy to see why Mr. Powell and his Fed colleagues would want to support Ms. Harris.
Anyone who has been to the grocery store knows that the Fed has not “beat” price inflation. However, official government statistics also show a “softening'' in the labor market. The Fed's latest rate cut likely has more to do with concerns about rising unemployment than with the Fed's assertion that inflation will soon reach its 2% target.
The Fed is between a rock and a hard place. If interest rates are not lowered, there are concerns that the economy will fall into recession and unemployment will increase. On the other hand, keeping interest rates low risks hyperinflation and a collapse in the value of the dollar. The most likely scenario is a return to stagflation, a combination of rapidly rising prices and high unemployment.
Interest payments on the national debt are expected to exceed $1 trillion this year, putting more pressure on the Federal Reserve to monetize its debt and further accelerating inflation.
The Fed's interest rate cuts may have increased the chances of Kamala Harris winning the presidency. However, this rate cut also increases the possibility that the next president will face a major economic crisis. This crisis is caused by, or will be caused by, the rejection of the dollar's status as the world's reserve currency.
The best thing politicians can do in a crisis is avoid the temptation to “stimulate” the economy. Rather, we should let the recession end on its own and begin dismantling the welfare war state and the fiat money system.
Ron Paul is a former U.S. Congressman from Texas. This article originally appeared on the Ron Paul Institute for Peace and Prosperity and is reprinted here with permission.
