Would a Federal Reserve Rate Cut be Irrational after Strong Q1 Growth?

The growth follows a strong year with good market stability, with the Dow Jones Industrial Average and S&P 500 Index reached new all-time highs. However, in the midst of the growth, some pundits are calling for a drop in interest rates by the Federal Reserve. Dropping the rate is traditionally seen as a tool for the Fed to spur economic growth.

Will the US Economy Keep Chugging?

The suggestion of a rate cut came from White House Economic Advisor Larry Kudlow, who expressed a desire to see rates drop in the relatively near term after citing weaker numbers in other indicators from Q1 2019. Kudlow’s comments suggested that a drop would be prudent to keep the economy chugging along at the current rate. In response, a host of economists laughed off the idea as irrational. With such massive growth rates and unemployment at near-historic lows, the economy seems strong. Yet, there are to be other indicators that are concerning.

Decreasing Consumer Confidence

The issue facing the economy concerns where the growth came from. All analysis seems to indicate that the main metric was increasing business inventories. This metric often belies a deeper issue, since rising inventories indicate lower sales — a sign of an impending recession. In fact, consumer spending dropped strongly during the first quarter. While inflation dropped as well, the indicator shows a movement toward decreasing consumer confidence and increasing market fear. The fundamentals that support economic growth are not as strong as the economy appears to show. Should the market continue to show these signs, a rate cut might be necessary.

Federal Reserve: Toying With Suffering

Ironically, 75 percent of the last Federal Reserve rate increases in history has led to a recession. As the Fed tightening has slowed, the hope of a ‘soft landing’ is clear — but another rate cut may be necessary to stop the flow toward economic decline. Further, the Fed’s policies have changed course over recent decades as it sails into uncharted economic waters that may result in a recession. As fears of an economic crisis increase, movement into hedge assets like Bitcoin (BTC) continues as well. Do you think market indicators show that the economy is strong, or is an economic recession looming? Let us know what you think in the comments below!