"Rate Cuts May Freeze Growth as Retirees and Businesses Hesitate"

Trump’s call for Federal Reserve interest rate cuts has reignited the debate over the efficacy of monetary policy in stimulating economic growth. The U.S. economy is currently facing a slowdown, and there is significant discussion over whether reducing borrowing costs will serve as a sufficient countermeasure. Market observers, including prominent figures like JPMorgan’s Chief Global Strategist David Kelly, are skeptical about the effectiveness of such a strategy in the present economic climate. Kelly argues that while rate cuts may provide a short-term boost to liquidity and risk assets, they are unlikely to address the underlying issues stalling growth.

The Federal Reserve is expected to reduce interest rates at its September policy meeting, with investors pricing in a 100% probability of at least a 25 basis-point cut, according to the CME FedWatch tool. However, Kelly challenges the prevailing optimism, asserting that historical patterns show rate cuts have not been particularly effective in spurring growth in the 21st century. In fact, he points out that post-Great Financial Crisis rate cuts did not produce the anticipated economic rebounds, raising concerns about relying on similar tactics today.

One of the key concerns raised by Kelly is the impact of rate cuts on retirees, many of whom rely on fixed-income investments. As interest rates fall, the income from these investments declines, potentially affecting a significant portion of the U.S. economy. Pension spending accounted for 7.4% of GDP in 2023, and with retirees often holding a large proportion of their savings in U.S. Treasurys, a drop in interest rates could erode their financial stability. This highlights a potential trade-off between monetary stimulus for broader economic growth and the welfare of specific demographic groups.

Additionally, the delayed economic response to rate cuts is a growing concern. Businesses and consumers may hesitate to take out loans if they expect interest rates to continue falling, leading to a postponement of spending and investment decisions. Data from the Federal Reserve’s Senior Loan Officer Opinion Survey and the Small Business Survey both indicate that businesses are delaying capital expenditures and facing increased financing challenges due to higher lending rates and fees. This suggests that even if rate cuts occur, the anticipated boost to economic activity may not materialize as quickly as expected.

Underlying economic uncertainty, particularly regarding the impact of tariffs and immigration policy, is also contributing to a cautious business environment. Many firms are hesitant to invest due to the unclear economic consequences of these policies. A Dallas Fed survey found that nearly half of Texas businesses were already experiencing negative effects from higher tariffs, and a Littler survey indicated that over half of employers were concerned about staffing challenges linked to immigration policies. Kelly emphasizes that this uncertainty is creating a “freeze” in economic activity, which is more detrimental than the rate cuts themselves.

Despite these concerns, Kelly does not anticipate a full-blown recession but acknowledges that the economy is decelerating. He urges for greater policy clarity to help businesses and consumers make informed decisions. The debate over the effectiveness of rate cuts underscores the complex interplay between monetary policy and economic conditions, highlighting the need for a multifaceted approach to address the broader challenges facing the U.S. economy.