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Wall Street may be welcomed by President Trump. After last year's stock market crash, Trump has been asking the Federal Reserve to cut interest rates and complaining that it would be wrong to suspend interest rate hikes even at current levels.
If there's any real impact, it's that the "interest rate hike pause carnival" of U.S. stocks makes the Fed less likely to cut interest rates. The recent strong retail and export data eased fears of a sharp economic slowdown, further weakening the reasons for interest rate cuts.
Investors have at least grasped the signal that they had expected the Fed to cut interest rates later this year, but now believe that the Fed is only 50% likely to cut interest rates by early 2020.
Some analysts said the financial market situation justified the Fed's interest rate hike last year, both maintaining economic growth and controlling risks. Reducing interest rates at this stage will only cause problems.
"One reason they should retain the option of raising interest rates is the need to maintain financial stability," Catherine Mann, Citigroup's chief global economist, said Wednesday at the Financial Stability Conference at the Levy Institute of Economics at Bader College.
Interest rates have been near zero for 10 years. "Changes in asset prices in a risk-reflecting direction are critical to enhancing financial market stability," she said, adding that stock prices and low-rated bond yields show that the market is still too optimistic.
Critics of the Federal Reserve, President Trump, Larry Kudlow, director of the White House National Economic Committee, and Stephen Moore, a potential nominee for the Federal Reserve, argue that interest rate cuts will accelerate economic growth in line with Trump's economic plan. They argue that central banks need not "ensure" that inflation risks are controlled by keeping interest rates unchanged when inflation risks are low.
Their analysis ignores the financial stability concerns that have been integrated into the Fed's decision-making since the financial crisis of 2007-2009. Mann spoke at a conference in memory of the economist Hyman Minsky. Minsky has explored how excess finance developed during the boom and released it in a disastrous way. The recession of 10 years ago shows just how badly this dynamic can hurt the real economy.


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