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An economy going crazy? Fed to cut interest rates despite record stock prices, low unemployment





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"It's a Mad Mad Mad Mad Mad," okay. The Federal Reserve is ready to lower interest rates even with stocks reaching record highs and the lowest unemployment rate in nearly 50 years.

It's a crazy world, crazy, crazy, crazy. Or we could believe by looking at the US economic situation.

Consider: Stocks are reaching highs, layoffs and unemployment are at their lowest in 50 years. Yet the Federal Reserve is ready to lower interest rates soon because it is concerned about the economy.

This is in the era of Trump. The president, who has called for the independent reduction of central bank rates, is likely to realize his wish. And especially because it is his own policies that worry the Fed.

The central bank fears that the White House's trade clashes with China and other countries are hurting farmers, manufacturers and exporters, slowing corporate investment and slowing the US economy.

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The global economy has had an even worse situation with the fate of many countries related to China.

"Global growth has slowed," said Mark Haefele, Global Head of Investment at UBS Global Wealth Management. "The various trade disputes and tariff increases have created uncertainty that prevents businesses from becoming more involved in investments."

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If that were not enough, a split Congress could lead to another stalemate this fall, resulting in the closure of the government or the freezing of federal spending. Both would be bad news for the economy.

That's why Fed President Jerome Powell is not really focused on the economy itself – everything is fine, actually. He is nervous about what economists call internal or external "shocks". A trade war is certainly called "a".

Hence his willingness to cut a key rate at the end of July.

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Not everyone is impressed. Many economists are skeptical that a slight reduction in already low interest rates will do nothing to stimulate borrowing or help the economy. Credit is cheap and readily available for years.

"His arguments in favor of easing are focused almost exclusively on the uncertainty created by trade negotiations and the resulting drag on business confidence and investment," said a frequent spokesman for Fed, Stephen Stanley, chief economist at Amherst Pierpont Securities. "I find the case for the softening incredibly weak."

A small amount of economic data this week is unlikely to influence the argument. Retail sales in June are likely to increase modestly and reflect healthy household spending, but some reports on the manufacturing sector are expected to remain weak.

See: MarketWatch Economic Calendar

It does not matter. The Fed is no longer rooted in its usual approach to setting interest rates. So, the usual rules do not apply.

Like the cast of characters from the 1963 hit movie, Mad Mad, Mad Mad World, in search of a stolen treasure, Fed officials seek to explain their possible turnaround 'interest. Remember, just seven months ago, the Fed predicted that it would increase its rates several times this year.

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Not anymore. Now the question is how many times that will reduce rates. And if it will be good.


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