What I Learned This Week

Pushing on a string: the lower interest rates fall, the less economic stimulus they provide.

The hope is that the Fed can engineer a soft landing by lowering the Fed Funds rate while maintaining GDP growth above 2%. But history shows that lowering short-term rates could exacerbate the slow growth that has prevailed since the GFC. Consider the following: 1) lower interest income on savings causes older workers and retirees to hold-back their current spending (they have to set aside more money to cover the income loss); 2) interest rates fall in deflationary times, creating deflationary expectations; 3) falling rates on long-term loans will not spur demand because the world is already choking on too much debt and uncertainty is intensifying among consumers and businesses; and 4) fisca…

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