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Shiller: 'Hot' Economy Would Benefit More From Rate Hike Than Cut

By    |   Tuesday, 30 July 2019 09:03 AM

Nobel Prize winner Robert Shiller contends that the "hot" U.S. economy would actually stand to benefit more from an interest-rate hike, as opposed to the expected rate cut from the central bank.

“We still have a very low unemployment rate. The economy is hot,” the Yale University professor recently told CNBC. “One could easily make a case for staying the course and doing another interest rate increase at this meeting to cool this economy.”

U.S. central bankers are expected to lower borrowing costs this week for the first time since the depths of the financial crisis more than a decade ago.

Even though Shiller says the Fed is doing a “brilliant job” navigating the twists and turns of the market and economy, he questions whether a move lower is necessary.

“While the inflation rate is below the target, it’s not that much more below it. The target is 2% and the inflation rate is 1.5%,” said Shiller. “We just set a new record. We passed 3,000 on the S&P 500. We are at a really high market,” he said.

“The Fed raised interest rates just before the stock market in 1929 crashed. They were concerned about overvaluation of the market and wanted to cool it,” he said. “It didn’t cool it very effectively. It caused a disaster. I’m a historian. I think about those things.”

Shiller doesn’t see any near-term indications of a depression or even a recession. However, he warns a Fed that is too easy could eventually set the stage for a painful crash, CNBC.com explained.

“There is too much history of governments overpowering the wisdom of the central bankers and ending up ultimately in inflation,” Shiller said. “It might take a while to get started, but eventually there is a risk of being in a bad situation.”

Meanwhile, Fed policymakers will not surprise markets if they deliver on expectations and cut U.S. interest rates for the first time in a decade on Wednesday, Reuters explained.

Less clear is how Fed Chairman Jerome Powell will manage debate at the central bank about whether the stimulus is necessary. The Fed chief faces a strong possibility that the move will draw at least one dissent.

Boston Fed President Eric Rosengren, one of two current policymakers who was present when the Fed last initiated a rate-cutting cycle nearly 12 years ago, earlier this month said he does not want to ease policy "if the economy is doing perfectly well without that easing," adding in a CNBC interview that the state of the U.S. economy is "quite reasonable."

Rosengren, along with Chicago Fed President Charles Evans, voted in favor of a half-percentage-point rate cut in September 2007, which proved to be the first of 10 cuts that would eventually take the federal funds rate to near zero.

If Rosengren objects this time, though, he may not be alone. Kansas City Fed President Esther George may also vote against a rate cut. In recent remarks, she said monetary policy is "in a good range," though she is "prepared to adjust those views" should downside risks materialize.

Rosengren and George are among the 10 people with a vote on rates on Wednesday, and they could shake up the Fed's normally consensus-driven approach. If both policymakers dissent, that would make the onset of this rate-cutting cycle more controversial than any of the Fed's last four.

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Nobel Prize winner Robert Shiller contends that the "hot" U.S. economy would actually stand to benefit more from an interest-rate hike, as opposed to the expected rate cut from the central bank.
shiller, hot, economy, rate, hike, cut
Tuesday, 30 July 2019 09:03 AM
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