While President Trump has urged the Federal Reserve to slash interest rates to strengthen the economy, the head of the Federal Reserve Bank of Boston warned Wednesday further rate cuts could come at a cost.
Eric Rosengren, president of the Boston Fed, told the Washington Post the U.S. economy is “relatively strong” due to the low unemployment rate, increasing wages, and economic growth due to strong consumer spending. But he warned against cutting interest rates now until the effects of the president’s ongoing trade war with China are felt more acutely by consumers.
“You don’t want to apply accommodation at a time when you don’t need it, in part because you won’t have it when you do need it and in part because there are side effects from pushing interest rates very low,” said Rosengren. “It encourages people to take more risk.”
Rosengren and other Fed officials will gather in Washington, D.C., this month to decide whether interest rates should be lowered or remain at the same level. In July, the central bank decreased rates by 25 basis points, taking the benchmark U.S. interest rate to a range of 2% to 2.25%. The July rate cut marked the first time since the 2008 financial crisis that the Fed reduced rates.
Since then, Trump has taken to Twitter to attack Federal Reserve Chairman Jerome Powell, whom he picked to succeed Janet Yellen last year, and push the Fed to cut rates again to boost the economy.
On Tuesday, the president claimed the central bank “fails to act” while Germany and other countries have negative interest rates. Trump also equated Powell to a “golfer who can’t putt” and suggested he is an “enemy” of the United States who has let the country down.
But Rosengren warned that slashing interest rates could have negative consequences.
“This isn’t a free lunch,” he said. “There are costs to accommodating at a time when the economy is doing reasonably well.”
While Trump often lauds the economic growth that has continued through his administration, there are concerns among economists that the economy is slowing, particularly as the trade dispute with China shows no sign of abating.
Economic downturn could hamper the president’s chances of reelection in 2020, and Trump has rebuffed any suggestion that a recession may be looming, instead placing the blame on the central bank. But Rosengren said the president’s tariffs on Chinese imports, in part, have played a role in affecting economic growth.
“Clearly there is a downside risk that trade or geopolitical problems could escalate, resulting in a much weaker situation than is currently anticipated,” he said. “What has prevented the economy from being stronger is the slowdown occurring globally and the tariffs.”
The latest round of duties on Chinese imports went into effect Sept. 1 and targeted a wide swath of consumer goods, including apparel, footwear, and electronics. The next round will hit Dec. 15.
