On September 16, Joshua McNichols posted on KUOW that "lower interest rates could have big implications for downtown Seattle." Why? Because "[w]hen interest rates go down, developers borrow more money. They use that money to build things." I did not give this prognostication much weight until the following day, September 17, when the Federal Reserve Chair Jerome Powell did something truly surprising and not at all in my cards. After months of raising the cost of borrowing (the Fed benchmark rate), with the goal of cooling inflation (more about that in a moment), he, as expected, cut the rate because inflation had fallen considerably since 2021. What no one expected was the size of the cut (50 basis points). NBC correctly described the move as a "super-sized cut." And, yes, it's large enough to open the door to another construction boom in Seattle (the nature of this boom, however, will likely be in the residential sector). Now is the time to borrow.
Will this dramatic cut impact the presidential election? What can be said with certainty is that it's bad news for Trump and good news for Harris.
After months of complaining about the crippling burden of high interest rates and expensive borrowing, Republicans, for some strange reason, don’t seem too happy that the Federal Reserve has moved to do something about it.
— Rolling Stone (@RollingStone) September 20, 2024
Story: https://t.co/5tfCtbUyG2 pic.twitter.com/no7AJhX1wc
And...
JD Vance fans in North Carolina boo the news that the Fed has cut interest rates 🥴 pic.twitter.com/mM7YfNkwhF
— Aaron Rupar (@atrupar) September 18, 2024
The boos at the JD Vance event have nothing to do with the cut not being low enough (as Vance insists), but the positive impact it will predictably have on an already strong economy. There will be, alas, no recession in the near future. Trump will have to stick to stories about pet-eating Black immigrants. It's the only game in town for him at this point.
And what does Yahoo Finance, which actually provides competent business reporting, have to say about the stock market on the day after the dramatic rate drop? "US stocks soared on Thursday amid growing optimism that the Federal Reserve's jumbo interest rate cut will deliver a 'soft landing' for the US economy." If this kind of thing continues, the former president may have to go to the next level: Haitians eat Ohioan abortions.
And just think of it. Trump placed Jerome Powell on the top fed seat. He wanted a white man to replace Obama's white woman, Janet Yellen (she now runs the US Treasury). But what does Powell do in return? He stabbed his former boss in the back. NBC: "Republican presidential candidate Donald Trump said on Thursday the U.S. Federal Reserve’s decision to cut interest rates by half of a percentage point was 'a political move.'" He is feeling it.
What Powell's deep rate cut communicates to the business community is confidence in the economy, in Biden's economy, in Bidenonmics. True, the majority of Americans will continue to believe that Republicans are better at economics (though this feeling is weakening by the day it seems), but this will not matter because the economy is still growing. Even if vibecession is a real thing, with real consequences, it still doesn't hit home like a real recession.
But what many readers will miss is how extraordinary all of this is. You must remember that the whole logic for raising interest rates was to cool inflation by cooling the job market. Powell made this goal public a year ago when he warned that interest rate hikes would be "painful." On his mind was the concept of a close relationship existing between the money supply, employment, and inflation. Constrain the first by making it expensive (or "dear," in the British sense), and this would hurt the job market by reducing investment (the source of all growth in a capitalist economy—not savings), and this would trigger deflation by reducing the number of people with the means to buy things. Demand drives up prices.
Though Powell is a conservative, he was using a standard Keynesian reading of inflation to justify the rate hikes. Now, as I pointed out in a recent post, Keynesian economics comes in two flavors: One that's very close to socialism (post-Keynesian), and one that's too close to neoliberalism (neo-Keyensian—Yellen is in this school). The idea of an inverse relationship between inflation and jobs was codified by the neo-Keynesian as the Phillips curve.
Marc Lavoie's superb Introduction to Post-Keynesian Economics provides this description of a concept developed in the 1960s by the neo-Keynesian economist and New Zealander Bill Phillips:
Phillips curve is probably one of the best-known relationships in economics. Traditionally, it links the rate of unemployment to the rate of price inflation or to the rate of wage inflation. More recently, its meaning has been extended to imply a positive relationship between the rate of capacity utilization and the rate of inflation.Â
Here we can clearly see what Powell had in mind when he started raising interest rates late last year. But it didn't work as expected. The job market continued to grow despite the increase in borrowing costs. What to make of this? The answer is actually simple. Capitalism is not natural like a tree; it is, as a whole, as cultural as a fetish. There is no direct relationship between employment and inflation in the way there's an organic relationship between the heart and blood. Economists, particularly of the neo-classical school, want us to believe in the realism of this connection, but, in truth, it mostly (if not entirely) exists in an intersubjective realm that's as real as a dream. The movie screen better explains capitalism than an operating table.
You can, therefore, have high employment and high interest rates and falling inflation. You can make nonsense of the Phillips curve and its neoliberal bastard, NAIRU (non-inflationary rate of unemployment), "the lowest unemployment rate at which inflation doesn't increase." Bidenonmics made that plain and clear. And, in a certain way, so did Bill Clinton's economy. As Lavoie put it: "[This is] what happened in the USA in the late 1990s, when strong growth rates and precipitous reductions in employment rates were not accompanied by any inflationary pressures."
All of this brings me to my Marxism. If capitalism is purely cultural, then we must abandon the idea that socialism can be scientific. We must instead propose an anti-capitalism that recognizes that economics, as we understand it today, which is very different from how it was understood in, say, the ancient times of Aristotle or Joseph, can only be a form of dreaming. We must counter one cultural form (or way for dreaming) with another. That is the most one can expect of socialism. Daydreams are always better than nightmares.Â
ÂÂÂÂÂView this post on InstagramÂÂÂÂÂÂÂÂÂÂÂ