Economist and author Art Laffer, the architect behind the Reagan tax cuts that ushered in an era of economic prosperity for a generation, said the Federal Reserve should read market signs of falling bond yields and lower short-term interest rates and slash short-term interest rates.
The bond market is signaling an increasing likelihood of the next Fed move being a reduction in the cost of borrowing money, CNBC explained.
“I do think it’s in the cards,” says Laffer, formerly an economic adviser to Presidents Donald Trump and Ronald Reagan.
“The Fed has always followed interest rates [in the bond market] not led them,” Laffer told CNBC.
“I think the chance of a lowering is quite high,” said Laffer, known for the Laffer Curve, a theory that basically argues that increasing tax rates beyond a certain point becomes counter-productive for raising tax revenue.
Laffer believes the Fed should not be worried about stoking persistently low inflation by allowing the economy to continue to grow unfettered.
“You can have a very strong economy with low interest rates,” said Laffer, co-author of “Trumponomics: Inside the America First Plan to Revive Our Economy.”
Meanwhile, cool inflation and a hot jobs market are putting the Federal Reserve’s policy goals at odds, but there is “no clarion call” to push interest rates either way as trade risks lurk, a top policymaker said on Tuesday.
“Today, the two elements of the Fed’s mandate are sending opposing signals for monetary policy, with low unemployment perhaps suggesting a bit tighter policy, and low inflation the opposite,” Boston Fed President Eric Rosengren said in remarks prepared for delivery to the Economic Club of New York.
Rosengren, one of 10 people who vote on the Fed’s rate-setting panel this year, said rates are a bit easy and can, along with a tight job market, revive inflation that might have declined only temporarily, Reuters reported.
He said a trade conflict between the U.S. and China - which could cut growth or raise prices - is all the more reason to keep rates on hold.
Even before the trade war flared, markets increasingly bet policymakers would cut rates to bring inflation up to its 2%-a-year target. But policymakers want to maintain the option of raising rates if wages or other prices rise or if markets get frothy.
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