The Fed Can’t Juice This Economy

It Can Only Inflate Asset Bubbles—and Everybody Knows It

A couple of months ago we wrote about periods of time when financial markets became disconnected from the real economy and how we were likely experiencing such a period now. We also expressed concern about the way in which the stock market increasingly is regarded as a proxy for the U.S. economy and its performance. This is even truer today than it was when we first wrote about it in April: U.S. financial markets have soared to record highs (the S&P 500 just had its best first half since 1997), even though our economy has weakened a bit, business anxieties have ratcheted higher, the yield curve inverted and earnings growth is slowing.

How can this paradox be explained? Well, we all know the answer to that question: the Fed will come to the rescue! Markets have placed an enormous amount of faith (and speculation) in the belief that rate cuts will be forthcoming in the second half of the year, which will be an impetus to spur growth. However, the near certainty around that assumption merits closer scrutiny. Foremost, there are some debatable arguments that underpin the case that rate cuts are needed for our economy at this particular time.