So the Fed did what everybody expected them to do, by cutting their target rate by a quarter of a point.
Over the past year, they have reduced that rate by 175 basis points. And it now stands at three and a half and three quarter percent.
Noteworthy, in today’s meeting, there were three dissents. President Trump’s man Stephen Miran wanted a half a point cut. President Obama’s man Austan Goolsbee didn’t want any rate cut. And the the Kansas City Fed’s Jeffrey Schmid also voted against the rate cut.
Stock markets roared with the Dow up almost 500 points, the S&P 500 almost hitting a new high, and bond yields coming down, including the 10 year, which dropped by 3.5 basis points.
And Mr. Trump, being the nation’s best Fed watcher, said this to business leaders in real time: “You know, growth doesn’t mean inflation.”
He added: “we should be able to do a lot better than three and four. We’re scheduled to be at 4 percent.”
Of the Fed’s move, Mr. Trump said, “He did a rather, I would say a rather small number that could have been doubled at least.”
So, Mr. Trump wants lower rates and I think he has a very good point.
The Fed’s economic projections for next year moved up to a still-paltry 2.3 percent. And then fades back to the usual 1.8 percent over the next couple of years. Inflation moves slowly toward 2 percent.
Yet their growth estimates are really laughable. Here’s one way to look at GDP which should be 3 percent to 4 percent rather than 1.8 percent.
Over the past three years, productivity has grown by 2.1 percent yearly. And by the way that doesn’t really include the enormous AI effects that are coming.
Then labor force growth over the same three years comes to 1.3 percent annually.
Putting the two together, you get 3.4 percent growth in real GDP.
That is a widely accepted construct, but AI could jump those numbers much higher, so could Mr. Trump’s basic platform of supply side tax cuts, deregulation, “drill, baby, drill,” and reciprocal fair trade.
Mr. Trump has a very energy-centric view of inflation. And he’s right. Lower energy prices permeate every nook and cranny of the economy, including food.
So this year, oil has dropped to $60 a barrel from $80. That’s 25 percent.
Very little of that has hit the CPI inflation index. But it’s coming. Just like gasoline under $3.
Lower inflation adds to real GDP. Just like productivity and supply side tax cuts.
That means you could get to 4 percent growth with less than 2 percent inflation.
That also means Mr. Trump is a better forecaster than all of the Fed’s economists put together.
Larry Kudlow is a columnist for the New York Sun. From Mr. Kudlow’s broadcast on Fox Business Network.
