Forget rate cuts, here's a better way to boost the economy

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The Fed cut interest rates this week and the stock market yawned.

Which is what every Fed chair wants—even if the latest one, Jay Powell, hasn’t always been very good at it. That’s because the Fed tries to telegraph moves in advance so that when it announces a change in rates, the market has already anticipated it, resulting in nary a ripple.

On the other hand rate cuts should have some sort of an effect, right? Otherwise why do them?

If the Fed isn’t in the business of jacking up the stock market, it is about supporting what’s called the real economy, i.e. businesses and consumers who would react to lower rates by borrowing money to invest or buy and therefore boosting the economy.

To be sure, you can’t expect an immediate or even sizable response from the real economy especially with rates so low. For instance, consumers won’t see a drop in their adjustable rate mortgages and home equity loan payments for a month or two—if they see one at all.

And yet many of us are obsessed with interest rate cuts (and hikes for that matter, which the Fed implements to cool an overheating economy), as if these moves are omnipotent decrees that could countervail any economic maelstrom and extend expansions indefinitely.

By extension, the world’s central bankers—the Fed chair and his cohort around the globe, (the ones who issue those decrees), have been cast as high priests, in full command of our economic destiny. Followers of this narrative are like a cult.

Which is to say that believing in all this is voodoo. And by definition dangerous. I like what market observer and Fed skeptic Jim Grant told CNBC not long ago: “I think the central banks are busy chipping away at the unwarranted faith in their pretense.”

Preach, Jim.

Federal Reserve Chairman Jerome Powell speaks during a news conference following a two-day Federal Open Market Committee meeting in Washington. (AP Photo/Manuel Balce Ceneta, File)

‘What will a rate cut do for the economy? In my view, not much’

Except I say the problem isn’t so much the bankers, it’s the believers. Too many policymakers think our economic difficulties can be solved by managing interest rates — specifically now by cutting them. They can’t. Central bankers have cut rates to the bone, to the point where they’ve gone negative in many parts of the world. And still growth is moribund and/or slowing. Yes, cutting rates can spur growth, but we’ve already gone so low that responses are now extremely limited.

Peter Costello, former Treasurer of Australia, (the equivalent of our Treasury Secretary) addressed this at our All Markets Summit in Sydney in October: “What will a rate cut do for the economy? In my view, not much. Every rate cut brings a little less of a return than the one before.”

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