Amid the White House\u2019s unrelenting pressure campaign on Federal Reserve Chairman Jerome Powell, President Donald Trump has not only demanded that the central bank to cut rates but to lower them all the way to 1%.<\/p>\n
The federal funds rate currently sits at 4.25%-4.50%, meaning a reduction of that magnitude would require a drastic move that goes well beyond the Fed\u2019s typical increments of a quarter point at a time (though it last cut by half a point in September). <\/p>\n
It\u2019s so extreme, Wall Street doubts it would actually happen, as it would trigger immense turmoil in financial markets and the economy.<\/p>\n
\u201cI don\u2019t think this needs to be taken too seriously, because it\u2019s so ludicrous, and in some ways cutting rates too low, too prematurely, too early would do exactly what you don\u2019t want to happen,\u201d Jeffrey Roach, chief economist at LPL Financial, told Fortune.<\/p>\n
That\u2019s because long-term Treasury yields would spike as bond investors price in higher expectations for inflation that a 1% rate would stoke, raising borrowing costs for consumers and businesses.<\/p>\n
In addition, a rate that low is usually associated with an economic emergency like the COVID-19 pandemic or the Great Financial Crisis.<\/p>\n
So 1% may actually shock businesses into wondering if another calamity is lurking around the corner, prompting them to hunker down and wait rather than expand, Roach warned.<\/p>\n
\u201cAs a big business owner looking at rates at 1% or 2%, I\u2019m definitely saying, \u2018what do you know that I don\u2019t?’\u201d he said. \u201cHence I\u2019m not going to respond by increasing capex and increasing operations to the company. I\u2019m going to be even more concerned with what that signals.\u201d<\/p>\n
A White House spokesman pointed to Trump\u2019s previous comments that the Fed always can and should raise rates again if inflation spikes after cutting them.<\/p>\n
For his part, Roach thinks there\u2019s probably room for rates to eventually drop to about 3.5% by the end of 2026, if inflation stays under control, and said Powell didn\u2019t raise rates soon enough when inflation was surged after the pandemic.<\/p>\n
Similarly, Infrastructure Capital Advisors CEO Jay Hatfield accused Powell of gross incompetence by being too late to raise rates but also blasted the idea of the Fed slashing rates to 1%.<\/p>\n
Treasury yields would initially drop in the immediate aftermath of a cut to 1%. But once inflation indicators start pointing higher, the fed funds rate would go back up to 4% to shrink the money supply, sending the 10-year yield to about 5%.<\/p>\n
After a mini-recession or a big pullback, the yield would end up around 3.75%. \u201cSo it\u2019s horrible economic policy to do that,\u201d he told Fortune.<\/p>\n
A fed funds rate around 2.75%-3% wouldn\u2019t stoke inflation or send the economy into a downturn, but keeping rates where they are now would trigger a recession, Hatfield added. A 1% rate, however, would require a massive expansion in the money supply. <\/p>\n
\u201cIt\u2019s absolutely a ridiculous idea and will cause double-digit inflation,\u201d he warned.<\/p>\n","protected":false},"excerpt":{"rendered":"Amid the White House\u2019s unrelenting pressure campaign on Federal Reserve Chairman Jerome Powell, President Donald Trump has not…\n","protected":false},"author":2,"featured_media":22161,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27],"tags":[28,12,2800,2402],"class_list":{"0":"post-22160","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-business","9":"tag-donald-trump","10":"tag-federal-reserve","11":"tag-inflation"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/22160","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/comments?post=22160"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/posts\/22160\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media\/22161"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/media?parent=22160"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/categories?post=22160"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/us\/wp-json\/wp\/v2\/tags?post=22160"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}