The One And Only Case for Lower Rates—Still Another Fix for Wall Street

There is surely no development more inimical to main street prosperity and democratic governance than the lock, stock and barrel capture by Wall Street of the nation’s central bank. That baleful condition enables and sustains the two very worst forces in American society today—the spenders and warmongers of Washington and the Wall Street speculators, who otherwise claim to be traders and asset managers.

The not-so-secret sauce of the Fed’s rogue monetary regime, of course, is artificial, ultra-cheap interest rates, which have been sustained over extended periods of time. In fact, the Fed’s key policy instrument—the Federal funds rate—has stood at negative levels in inflation-adjusted terms for more than 93% of the time since March 2008. And even the current positive rates barely peeking above the zero bound per the chart below are still far, far below the healthier levels recorded from 1984 through the year 2000.

Yet ever since the real funds rate turned marginally positive in July 2023 the crescendo of drumbeats on Wall Street for a new round of rate cutting has become overwhelming. Then again, what the hell was so onerous or economically oppressive about the real Fed funds rate at just +1.82% in February?

To hear the Wall Street crowd tell it you’d think the US economy was about to be drop-kicked into the recessionary drink in the absence of a new round of rate cuts. But that’s just risible, blithering nonsense. The only plausible reason for rate cuts after years of negative-cost money in real terms is to trigger and sustain a new bubble atop the already wildly inflated stock market.

Let us repeat. It’s all about enabling leveraged speculators to chase stock prices higher. That’s owing to the fact that lower rates will cause PE multiple expansion while simultaneously reducing the funding cost of those positions via cheaper margin loans or options premiums.

That’s the racket. That’s the entirety of what the Fed’s “rates policy” is all about. And it’s a pretty pitiful state of affairs indeed because there is no imaginable reason of state to help the one-percenters speculate more successfully, and to thereby even further tilt the distribution of financial wealth to the tippy-top of the economic ladder.

Inflation-Adjusted Federal Funds Rate, 1984 to 2024

To be sure, the Fed heads and their Wall Street shills insist that the hideous repression of interest rates shown above was all in the service of making life better on main street. That is, causing higher levels of business investment, more residential housing construction and a less volatile business cycle.

The problem, of course, is there is not a shred of evidence for those propositions. And we mean none as in nada, nichts and nugatory.

For instance, here is a chart of the business cycle since 1948 as measured by the annualized rate of real GDP change. The recessionary bottoms during the last two recessions have actually been deeper than during any of the 10 downturns before the Great Financial Crisis of 2007-2009.  And aside from the aberration of the lockdown plunge and rebound of 2020, business cycle recoveries during recent decades have generally been weaker, too, which is not anything to write home about.

Awhile back, Ben Bernanke even had the nerve to crow about the “Great Moderation” during his early years on the Fed. The implication was that owing to the superior efforts and insights of the 12 members of the FOMC the historical turbulence of the business cycle had been thoroughly ironed-out.

Alas, that untimely speech was given in March 2004, but everything on the chart right of that date more nearly suggests the opposite.

Annualized Rate of Real GDP Change, 1948 to 2023

Likewise, scratch a Fed apologist and they will say because housing. We think not, of course.

After all, the shift to rampant money-printing incepted with Greenspan in 1987 and has gotten progressively more aggressive ever since. Yet aside from the infamous Greenspan housing bubble of 20o3 to 2006, which was short-lived and gave everything back and then some on the downside, there has been no increase in the share of GDP devoted to residential housing construction. In fact, on a smoothed basis, the trend has been to lower, not higher, residential housing investment.

Besides, there is more than one way to skin a cat—if the societal policy objective is more housing opportunity for those most in need. The latter can be achieved via means-tested direct subsidies, say in the form of mortgage buydowns, at far lower cost and with none of the adverse collateral effects of cheap mortgage rates.

By contrast, artificially repressed market interest rates accrue to the rich and poor alike, thereby conferring far greater dollar value among the former who often use multi-million dollar “jumbo” mortgages to finance their primary residence, to say nothing of second and third homes, too.

Residential Investment As % of GDP, 1978 to 2023

At the same time, the unfortunate collateral effect of below-market mortgage rates is to cause the price of existing housing stock to be bid-up, thereby conferring huge windfalls on existing homeowners and barriers to entry for newly formed households entering the market for the first time.