Federal Reserve Interest Rate Cut: Not Enough to Prevent Downturn, Says Steve Hanke
Introduction
The Federal Reserve's decision to cut interest rates by 0.5% has been met with mixed reactions. Some economists believe the move will help boost the economy, while others warn that it may not be enough to prevent a downturn.
Steve Hanke's View
Steve Hanke, a professor of applied economics at Johns Hopkins University, is one of those who believe the rate cut will not be enough to prevent a downturn. He argues that the economy is already slowing down and that the Fed's move is too little, too late.
Hanke points to several factors that he believes are contributing to the slowdown, including the trade war with China, the decline in manufacturing, and the rising cost of healthcare. He also notes that the Fed has been raising interest rates for the past two years, which has made it more expensive for businesses to borrow money and invest.
What the Data Shows
The data seems to support Hanke's view. The economy grew at a rate of just 2.3% in the third quarter of 2019, down from 3.1% in the second quarter. Manufacturing output has also declined in recent months, and the unemployment rate has ticked up slightly.
In addition, the yield curve has inverted, which is often seen as a sign of an impending recession. The yield curve is a graph that shows the interest rates on Treasury bonds of different maturities. When the yield curve inverts, it means that short-term interest rates are higher than long-term interest rates. This is usually a sign that investors are expecting the economy to slow down in the future.
What the Fed Can Do
Hanke believes that the Fed needs to do more to prevent a downturn. He argues that the Fed should cut interest rates further and start buying Treasury bonds in order to increase the money supply.
The Fed has been reluctant to do this, however, because it is worried about inflation. If the Fed increases the money supply too much, it could lead to higher prices.
Conclusion
The Federal Reserve's decision to cut interest rates is a step in the right direction, but it is likely not enough to prevent a downturn in the US economy. The economy is already slowing down, and there are a number of factors that are contributing to the slowdown. The Fed needs to do more to address these factors, or the economy could be headed for a recession.
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