Strong Growth and Muted Inflation: How Will the Fed React?

Fed to balance strong growth and muted inflation

The Fed is starting its two-day policy meeting tomorrow. While the markets aren’t expecting any changes in rates following the meeting, they’re keenly awaiting the Fed’s strategy to deal with strong economic growth accompanied by low inflation (TIP). Investors will also be looking forward to Fed chair Jerome Powell’s remarks after the meeting for clues about their thinking.

Strong Growth and Muted Inflation: How Will the Fed React?

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Can Trump have it both ways?

As we highlighted in Strong Economy and a Rate Cut: Can Trump Have It Both Ways? even after a strong jobs report, Trump yet again called out the Fed, saying, “I think they should drop rates and get rid of quantitative tightening.” He added about the economy, “You would see a rocket ship. Despite that we’re doing very well.” Trump and some other White House officials have been calling for the Fed to cut interest rates by 50 basis points to support the economy (DIA)(IVV).

Strong economy

There’s a slight contradiction in the statement itself. If the economy (SPY) were really as strong as Trump says it is, would it warrant a rate cut (TLT)(AGG)? Usually, central banks use rate cuts to stimulate the economy when slowdown concerns take hold. Robert Heller, the Fed’s former governor, shares this opinion.

As CNBC reported, Heller said in March, “On the one hand, the administration says the economy will grow, perform really well…On the other hand, they want to have low interest rates. You really can’t have it both ways.”