This Is Why The Fed Must Keep Cutting Interest Rates
Or else America could be in for a world of pain.
Key point: High corporate debt and faltering profits have created an unstable environment.
The U.S. Federal Reserve is stuck between an apparently booming economy and a financial crisis that might be right around the corner.
That’s why its decision to cut interest rates by another quarter point on Oct. 30 – its third reduction in as many months – seems so odd. Lowering rates when the economy is as strong as the numbers make it out to be is practically unheard of. And, according to textbook economics, lowering interest rates during a boom is a sure recipe for disaster.
The trouble is, as someone who studies financial booms and busts, I know that not lowering rates may be even worse. That’s because the corporate sector is dangerously over-indebted, creating a financial bubble.
A hike in borrowing costs could kick-start a cascade of bankruptcies in a financial contagion that would derail the U.S. economy.
Troubles Below the Surface
On the surface, the U.S. economy appears to be humming along just fine.
Unemployment’s at a half-century low. Inflation is near its target of 2%. And, at about 125 months, the U.S. is charting its longest economic expansion since at least the 1850s.
Look under the hood, however, and things look very troublesome.
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