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why are we cutting rates at all economics 101 and today's lesson the Federal Reserve and interest rates the rain we're talking about is the Fed Funds rate it's the rate that they the the central bank uses for to dictate what banks will lend between each other on overnight basis it changes the cost of credit it can stimulate growth or it can restrain an economy it's typically lowered very quickly during recessions on the prospect of recession here's 99 but this is the Great Recession of course load very very fast from where nearly 6% right the way down to just half a percent and then it's gradually raised when the economy is healthy which is what you're seeing over there on the far edge the nine raised stages that we have seen this will see if they cut tomorrow by the way it will be the first of a downward series since 2008 today the US economy is looking LT by most metrics growth is Charlotte to 0.1 percent Donald Trump says he wants it higher well let's see if we can do that four percent seems a long way off unemployment 3.7 that is the stellar performing part and in fresh inflation figures a one point six shows getting closer to the feds target the Fed torrent the current Fed rate is two point five percent higher than most other countries except emerging economies Donald Trump's chief complaint says that this two point five percent puts it at a disadvantage compared to the UK at three quarters the EU at zero percent Japan negative there's a lot there to take in luckily for us Mohamed el-erian is an advisor at GSE and he's with us good to see you but this you make yourself comfortable Serbs thank you now first things first is a rate cut tomorrow which everybody believes I think you probably believe too is going to happen is it justifiable it is not justifiable on traditional metrics as you pointed out i economies have been fine in fact we've got very strong numbers this morning on consumer confidence so if you look in terms of your traditional metrics it's not the justification the Fed is going to make is twofold one they're gonna say we need an insurer because the rest of the world is hurting and we don't want be contaminated and - is that the PCE 21.6% you show us below our target what I really think is happening is the unwinding a mistake they made a mistake last December they shouldn't have hiked last December that fourth weight hike was excessive and they just had to take it back of the Fed Funds rate that the the the steep decline of course of 2008 was entirely justifiable the slow rise up again and just does it make a difference if you just take one back so it shouldn't make a huge difference what difference will it make if you just nudge off one not so ironically where it makes a difference is in the rest of the world the rest of the world sees this as either being forced or being able to relax their monetary policy so what what we're doing we're creating an umbrella for everybody else to loosen the monetary policy that is why the dollar is not getting weaker as the president would like explained so normally when you lower interest rate you attract less capital because people earn less and that brings pressure on your dollar on your currency but what's happening now is that the rest of the world is being even more dovish than we are so our currency today is at the strongest level it's been all year and that's quite an appreciation since the start of the year which makes the president's call for an interest rate cut somewhat justifiable in that sense but it also shows the the lack of understanding of the the numerous currents underneath that really dictate the economy so two things one is that it's justifiable in terms of what's happening elsewhere right and it's justifiable in terms of most people with agreed December's hike was a mistake but you know this is a political equation it's a win win for the president if the economy slows who do you blame the Fed if the economy does well who do you say is because of me despite of what the Fed did so politically it's a win-win situation but economically one can't really justify this particular cut correct and economically one can justified politicizing an effete but listen to the President of Mexico has also taken seem to taken a leaf out of a president Trump's book in terms of how he views the ability to cut rates have a listen they are more cautious they are more cautious about inflation mr.
Barrow that is not a bad thing this is not the wrong thing to do I'm not saying that but it's important to lower rates to encourage growth low rates to courage growth is fine when inflation is not a problem inflation of a problem is it now because of what's happening to price discovery we you and I through what I call the uber effect the Google effect and the Amazon effect have taken pricing power away from people who sell it to us everything you taught in economics and everything that I've ever understood suggests with an unemployment rate of three point seven percent growth of two to three fifty two percent interest rates should not be near zero you're absolutely right so you have to understand the reason why interest rates in the US or so low is because of Europe they are negative in Europe you have thirteen trillion dollars of bonds trading at negative yield people are willing to give their money to either government or company and pay for the privilege of doing so you will find no textbook that has this in there but that's the amount of distortions that have been created in the in in the global car
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