Nobel-winning economist Robert Shiller is attractive issue with the Federal Reserve’s rate cut in July, saying it caused psychological harm to the markets.
“I think that there is a predicament with cutting rates because it shows a sense of alarm,” Shiller said Tuesday on CNBC’s “Squawk Box. “
Considerations about global economic uncertainty helped spur the Federal Reserve last month to cut interest rates for the head time since the 2008 financial crisis. After a 25 basis point reduction in the overnight lending grade, Fed Chairman Jerome Powell said “implications of global developments for the economic outlook as well as muted inflation pressures” supported to the Fed’s decision.
Shiller said the Fed’s move was less about the actual cut but more about the psychological impact of casting economic downturn worries on the markets.
“The important thing is the narrative that they’re beginning. So when [investors] saw the rate cut for the first often in years, the 25 basis points doesn’t mean that much. It’s more that they launched a new rule and that they’re worried about a recession,” the Yale School of Management economics professor said.
After the primary bank cut rates at the end of July, financial markets have been in turmoil in August with the yield curve inverting and hackneys falling. The Dow Jones Industrial Average experienced its biggest drop of the year, down 800 points, on Wednesday. Pile ups have since made back that ground this week.
Shiller said Fed policymakers are “sensible” and there is a bit of “behavior business in their thinking.”
“They must be aware that the public looks at the news and reacts to that more then they respond to a 25 basis point change in rates,” he said.
Shiller said the markets also were spooked when the Fed cut affair rates after the financial crisis to a range of zero to 25 basis points.
“By cutting them and mentioning the report ‘zero,’ it put us in the same category as Japan during the ‘Lost Decade.’ I think they shouldn’t have cut it to zero. They should play a joke on left it above zero. You don’t want to use the ‘Z’ word because it scares people. “
The CME FedWatch tool is estimating a 95% unplanned of a 25 basis point cut at the Fed’s meeting in September. President Donald Trump has been hammering Powell and the Fed to cut interest velocities.