Kudlow calls for one half point rate cut by Fed

FILE: Larry Kudlow speaking at the 2015 Conservative Political Action Conference (CPAC) in National Harbor, Maryland. (Photo: Gage Skidmore/Flickr, CC BY-SA 2.0)

WASHINGTON – A top Trump administration official on Friday called on the Federal Reserve to cut its key interest rate by a half-percentage point.

Larry Kudlow, head of the president’s National Economic Council, said in an interview with CNBC that the Fed should do more to help the economy by cutting rates. It signalled last week that it expected to keep rates unchanged for this entire year after raising its benchmark rate four times in 2018 to the current level of 2.25 per cent to 2.5 per cent.

Kudlow said his comment reflected the president’s views but he denied it was an effort to pressure the Fed, which was set up as an independent body to provide assurances to financial markets that its actions on rates would be free of political influence.

“I am echoing the president’s view. He has not been bashful about that view. He would also like the Fed to stop shrinking its balance sheet,” Kudlow said.

Later Friday, Trump sent out a tweet repeating attacks he has been making about the Fed’s rate hikes. “Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!” Trump said in his tweet.

Last week, Trump announced he was nominating Stephen Moore, a former Trump campaign adviser and frequent Fed critic, to one of two vacancies on the seven-member Fed board.

In an earlier interview with Axios, an internet news site, Kudlow was quoted as saying he would like to see the Fed “immediately” cut its rates by one-half percentage point. But in his CNBC interview, Kudlow said “immediately” may have been a misquote. “But at some point, I wouldn’t mind seeing the Fed drop their target rate.”

Kudlow said there was no “emergency” that was causing him to go public with his desire for a sizable Fed rate cut, although he did refer to the recent “inversion” of the yield curve, a development in which a short-term rate goes above a longer-term rate. In the past, such an inversion has been a good predictor of a future recession.

But Kudlow insisted that while the economy has slowed, the labour market and underlying growth in consumer spending and business investment have remained strong.

At its last meeting in mid-March, the Fed kept its target rate unchanged and signalled that it now expected to keep rates steady for the whole year. That represented a change from December when it had signalled that it expected to make two rate hikes this year.

Kudlow’s call for a sharp rate cut by the Fed is in stark contrast with President Trump’s touting of the U.S. economy, which he says is in its best shape in decades. Typically, the Fed raises rates when the economy sizzles, to prevent inflation from accelerating.

“The economy is roaring,” Trump said Thursday night at a rally in Grand Rapids, Michigan. “America is now the hottest economy anywhere on the planet Earth.”

Even with nine rate hikes beginning in December 2015, the short-term interest rate the Fed controls is still at historically-low levels. It is typically much higher when the economy is strong: It was 5.25 per cent in 2007, before the Great Recession, and was 6.5 per cent in the summer of 2000, the last time the unemployment rate fell below 4 per cent. It now stands at 3.8 per cent.

Most economists think the relatively low short-term interest rate is justified because inflation is so low. Others say it points to longer-running challenges facing the U.S. economy: With the population aging and productivity low, it is harder to generate rapid economic growth and the inflation that often comes with it.

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AP Economics Writer Christopher Rugaber contributed to this report.