Over the past year, the Fed has reduced their target rate by 175 basis points. And it now stands at three and a half and three-quarter percent.
Noteworthy, in today’s meeting, there were three dissents. Trump’s man, Stephen Miran, wanted a half a point cut. Obama’s man, Austan Goolsbee, didn’t want any rate cut. And the Kansas City Fed’s Jeffrey Schmid, also voted against the rate cut. Stock markets roared with the Dow up almost 500 points, the S&P 500 almost hit a new high, and bond yields came down, including the 10 year, which dropped by three and a half basis points.
And Mr. Trump, being the nation’s best Fed watcher, said this to business leaders in real time, “you know, growth doesn’t mean inflation. We should be able to do a lot better than three and four. We’re scheduled to be at four percent. He did, I would say, a rather small a number that could have been doubled at least.” So, Mr. Trump wants lower rates and I think he has a very good point.
The Fed’s economic projections for next year moved up to a still paltry 2.3%. And then fades back to the usual 1.8% over the next couple of years. Inflation moves slowly toward 2%. But their growth estimates are really laughable. Here’s one way to look at GDP which should be 3 to 4% rather than 1.8%. Over the past three years, productivity has grown by 2.1% yearly. And by the way that doesn’t really include the enormous AI effects that are coming. Then labor force growth over the same three years comes to 1.3% annually.
Putting the two together, you get 3.4% growth in real GDP. That is a widely accepted construct, but AI could jump those numbers much higher, so could Mr. Trump’s basic platform of supply side tax cuts, deregulation, drill baby drill and reciprocal fair trade. Mr. Trump has a very energy-centric view of inflation. And he’s right. Lower energy prices permeate every nook and cranny of the economy, including food.
So this year, oil has dropped from $80 to $60. That’s 25%. Very little of that has hit the CPI inflation index. But it’s coming. Just like gasoline under $3. Lower inflation adds to real GDP. Just like productivity and supply side tax cuts. That means you could get to 4% growth with less than 2% inflation. That also means Mr. Trump is a better forecaster than all of the Fed’s economists put together.
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