Why the FOMC Wants to Cut Rates

This article originally appeared in the Economic Prism. 

Capital follows a wide-ranging lifecycle.  First it is imagined.  Then it is produced.  Later it is consumed.  Ultimately, it is destroyed.  How exactly this all takes place involves varying and infinite undulations over decades and centuries.

One generation may produce wealth.  While the next generation consumes it.  So, too, a doomed generation may inherit an insurmountable debt burden – in the form of mega amounts of government debt – that will dog it to its dying breath.  Ingenuity and resolve will be significantly stifled.

As we understand it, the value in money is in what it represents.  Every dollar of actual money should be derived from a dollar’s worth of wealth that has been produced.  And every dollar of credit multiplied upon that money should imply a dollar’s worth of wealth plus interest that’s in the process of being created.

This is how wealth creation should work in a world where money is sound, budgets are balanced, and bankers stand behind their loans.  The present world, however, rarely works as expected.  Through policies of state sponsored wealth destruction, wealth is extracted from those who created it and then set on fire with systematic efficiency.

This is accomplished through fake money, deficit spending, and central bank manipulation of credit markets.  It is also accomplished through transfer payments, warmongering, tax credit policies, and public spending programs.

The results are an unending assortment of gross distortions, misallocations, debt pileups and losses.  Moreover, the average wage earner – someone who works hard, saves money, and pays his way in life – doesn’t stand an honest man’s chance.

Plotted Dots

Within the system of fake money, big deficits, and central bank intervention, money is continually debased.  The relationship to the underlying wealth that money represents is degraded.  The money’s purchasing power is impaired.  The labor that earned the money is diminished.  The time it took to accumulate it is stolen.

When a government pursues largescale, state sponsored counterfeiting operations…when it issues bogus money – money that has no definite relation to any form of wealth that’s been produced – what comes next is well known.  There’s progressive inflation of consumer and/or asset prices, which can only be halted by a central bank engineered financial disaster.

This week, following the two-day FOMC meeting, the latest monetary policy statement was released.  In short, the Fed is keeping its target range for the federal funds rate at 5.25 to 5.5 percent.  The dot plots, however, provide some new signals.

In 2024, the Fed is projecting three rate cuts totaling 75 basis points, bringing its median rate to 4.6 percent.  This is consistent with prior projections.  But in 2025 and 2026 the Fed is now projecting fewer rate cuts.

Specifically, the FOMC median rate forecast for 2025 is now 3.9 percent, up from the prior forecast of 3.6 percent.  And, for 2026, the FOMC median rate forecast is now 3.1 percent, up from the prior forecast of 2.9 percent.

In the post-meeting press conference, Powell noted that that with respect to QT, “it will be appropriate to slow the pace of runoff fairly soon.”

Does it matter that the Fed is now projecting fewer rate cuts in 2025 and 2026?

In reality, the Fed’s projections for 2025 and 2026 are useless.  By the time the calendar reaches these markers the economic landscape will be much different than today.

Highly Accommodative

More importantly, cutting rates in 2024 in the face of a 3.2 percent CPI is reckless from our perspective.  We believe that with the insane amounts of deficit spending coming out of Washington, higher inflation is here to stay.  The Fed’s forecasts of three rate cuts in 2024 further supports this position.

A federal funds rate within a target range of 5.25 to 5.5 percent does not generally indicate restraint.  Not when prices are inflating at an annual rate of 3.2 percent.

Using the higher end of the federal funds rate target of 5.5 percent, that comes to a real inflation adjusted interest rate of 2.3 percent.  And when using the 4.6 percent median rate that will follow the projected three rate cuts later this year, and assuming inflation remains the same, that comes to a real inflation adjusted interest rate of 1.4 percent.

These interest rates are highly accommodative.

The perception of restraint implied by current interest rates is the result of society being made dependent on near-free money after more than a decade of insane monetary policies.  Moving away from zero interest rate policy, like moving away from a 3,000 calorie per day diet, may cause some pain.  But that doesn’t mean it isn’t healthy.

Acquiring real capital requires real work.  Thus, capital is to be used wisely.  The cost of funds – the rate of interest – is the mechanism for administering the wise use of capital.

The extended free money episode that followed the 2008-09 great financial crisis made capital readily available.  Yet, this wasn’t real capital that took real work to attain.  It was fake capital that was given away for free.

The fake capital may have acted like real capital.  It could be borrowed and spent to acquire real things.  But without the natural limitations of an interest rate premium, the fake capital was used without discretion.

Why the FOMC Wants to Cut Rates

In short, the fake capital delivered countless price distortions.  Business ventures of marginal value, overbuilding of commercial real estate towers, electric vehicles that don’t get you where you need to go, overpriced stonks, and on and on.

Governments – federal, state, and local – also borrowed the cheap money and spent it with little accountability.  Between 2008 and the present, the national debt spiked from $11.3 trillion to over $34.5 trillion.

Similarly, corporations borrowed the ultra-cheap money and spent it on things that do not produce future growth – like debt funded share buybacks and dividend payments.  Without the Fed’s fake capital, these financial engineering schemes wouldn’t have been possible.

Higher interest rates, on the account of rising consumer price inflation, should make capital dear.  Moreover, higher interest rates should compel borrowers to use capital wisely.

But with consumer prices still inflating at an annual rate of 3.2 percent, a cost of funds of 5.5 percent – and soon 4.6 percent – does little to promote the prudent and efficient use of capital.  Rather, it amplifies the price distortions, debt accumulation, and speculative fervor that brought on the current mess and pushes it towards an even greater crisis.

Given these fundamentals, why does the FOMC want to cut rates?

Here at the Economic Prism, we don’t pretend to know what interest rates should be.  Still, we prefer to let interest rates be determined by willing borrowers and lenders (i.e., the free market) rather than a committee of unelected bureaucrats.

These bureaucrats don’t have any more clue what interest rates should be than your neighbor’s dog.  But they do know what they ‘want’ interest rates to be.

Remember, these unelected bureaucrats work for the big banks.  And the big banks want lower interest rates to bail out all their awful loans.

Thus, the FOMC wants lower interest rates too.