According to “Trumponomics” co-author Art Laffer, the Fed should heed the advice of President Donald Trump and Wall Street and lower short-term interest rates.
“I do think it’s in the cards,” said Laffer, who served as an economic adviser for both Trump and Ronald Reagan who also is known for the “Laffer Curve,” a theory that says raising taxes beyond a certain point becomes counterproductive for raising tax revenues.
The bond market continues to signal a rate cut the further into the year we get, with nearly a 70% chance for a cut by the Fed’s December meeting. The Fed raised rates four times in 2018, helping cause a lot of stock market volatility in the fourth quarter.
The 10-year Treasury yield has dropped almost 10% since the beginning of the year, down to 2.43% Tuesday. In contrast, the S&P 500 has risen 13% in 2019, even under the threat of the U.S.-China trade war.
“The Fed has always followed interest rates (in the bond market) not led them,” Laffer said in an interview on CNBC’s “Squawk Box”. “I think the chance of a lowering is quite high.”
Laffer, who co-wrote “Trumponomics: Inside the America First Plan to Revive Our Economy” along with economist Stephen Moore, who was forced to withdraw from Fed board consideration this month, said the central bank should worry less about low inflation by allowing the economy to continue growing unfettered.
“You can have a very strong economy with low interest rates,” Laffer said.
The Fed’s dual mandates are to control inflation and maximize employment, and the central bank uses higher interest rates to prevent the economy from overheating.
However, as Laffer notes, “inflation is not a simple thing to understand,” saying he was “totally wrong” when he predicted inflation would rise due to the Fed’s prolonged easy money policies and QE used to boost the economy out of the Great Recession about a decade ago.
