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Former Fed officials warn Trump, Wall Street: Only 1 interest rate cut is likely needed

At least six former Fed leaders have spoken out to try to prepare markets for a possible ‘one and done’ scenario

Federal Reserve Chair Janet Yellen speaking during a news conference in Washington D.C. on Dec. 13, 2017. (Carolyn Kaster/AP). (Carolyn Kaster/AP)
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On the eve of the Federal Reserve’s decision about what to do with interest rates, former top Fed officials are taking an unusual step to speak out in favor of a rate cut — but just one.

The Fed is widely expected to do a modest interest rate cut Wednesday, taking the benchmark U.S. interest rate from its currently level of just shy of 2.5 percent down to just below 2.25 percent, but the Fed’s path for the rest of the year is highly uncertain. President Trump has called for a “large” cut, and Wall Street is currently pricing in three cuts by the end of the year, a far more dramatic move that is typically reserved only for times when the economy is in trouble.

Six former Fed leaders have voiced at least some support for a controversial rate reduction this week, including former Fed Chairs Alan Greenspan and Janet L. Yellen, former vice chair Donald Kohn, and former New York Fed President Bill Dudley. But none expressed support for any additional easing, as Trump and Wall Street want.

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Many of these former officials say it would be wise to stimulate the U.S. economy with slightly lower rates to try to counteract the negative effects of Trump’s trade war and weak growth overseas. But they said they would want to see much clearer evidence of trouble before giving the economy additional aid.

“I think there’s a good chance the Fed won’t be cutting further anytime soon,” wrote Dudley in a Bloomberg opinion piece Tuesday where he said it would not be a mistake to cut this week. “All told, the case for lowering rates is less compelling now than it was when the [Fed] last met in June.”

This cut would be the first since December 2008 during the height of the financial crisis and Great Recession. Today the situation looks very different with stocks sitting at record highs, unemployment at a half century low, inflation that is modest, and growth at a pace most economists think is healthy.

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Dudley’s comments echo what Yellen said at an Aspen Institute event on Sunday and are similar to what Greenspan said in a Bloomberg TV interview last week.

“I think in light of the risks, I would be inclined to cut a bit,” said Yellen, adding that she “wouldn’t see this as the beginning, unless things change, of a major easing cycle."

Greenspan told Bloomberg Wednesday that “forecasting is very tricky” and while the economy appears on solid footing now, some events can be so dangerous to the economy that “it pays to act to see if you can fend it off,” a seeming endorsement of the Fed’s direction although he does not like to comment directly on imminent Fed moves.

This week Greenspan told The Washington Post that the economy is in an unusual place where the “level of interest rates right at this stage, given the type of economy we have, is really quite surprisingly low."

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Kohn and former Fed governors Frederic Mishkin and Sarah Bloom Raskin urged Fed Chair Jerome H. Powell and his colleagues to be more clear about why they are doing a cut this week and what they will watch going forward.

“The reason the markets are out of sync with the Fed is because the Fed is not explaining itself well enough,” said Mishkin, who was a Fed governor from 2006 to 2008. “If they cut rates this week and then come out and say, ‘but we won’t cut rates further until we have more evidence things will go south,’ I think that is a better policy.”

Many former Fed officials worry that the public might see the Fed’s actions this week as a sign the central bank is caving to Trump or Wall Street instead of doing what’s best for the economy. Keeping the Fed independent of political influence is widely viewed as critical for a strong economy and financial markets.

“The Fed has really had a bit of a communications blunder,” said Bloom Raskin, a Fed governor from 2010 to 2014. “If Americans don’t understand exactly what is happening and why, they may think that Chairman Powell is caving into presidential bullying.”

She said Powell and his colleagues must do a better job explaining this week’s cut is for “preventive reasons” to try to stop the economy from getting knocked off course.

Kohn noted that “a quarter point by itself, one way or another, rarely makes a big difference,” and that he expected Powell to “send a signal of flexibility” about interest rate policy going forward.

“I’m not sure why the market has built in strong easing expectations,” said Kohn, who worked at the Fed for four decades, culminating in being vice chair from 2006 to 2010. “Most of the data since the June meeting have exceeded expectations.”


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