Many Wanted Interest Rates to Come Down

They may soon get their wish

Photo by Kenny Eliason on Unsplash

The Federal Reserve (Fed) puts brakes on the economy by increasing interest rates and reducing the amount of money in the system. It does the opposite to stimulate the economy.

The president creates budgets which are approved or amended by congress. Spending more money on programs stimulates the economy. Spending less contracts the economy.

When I was young full employment was considered to be 5% unemployment. If about 5% of people who wanted a job were looking, that was considered good.

Inflation is caused by too much money going after too few goods. When my oldest son was in middle school, I asked him if he knew what caused inflation. “Isn’t that when everyone wants a watermelon on a hot day, so the price goes up?” Not bad.

As people spend more money the economy heats up. Inflation, the cost of goods and services, goes up. The Fed intercedes by lowering the money supply and interest rates go up. During the Biden administration, we had the government throwing money at an economy with low unemployment. Inflation was the result. The Fed interceded and we have low unemployment and high interest rates.

I’ve been asked when interest rates will come down. Some people want to buy a home or refinance their current home. My response has been, “Be careful what you wish for. Interest rates will not go down until the Biden administration stops spending money. When that happens, you may not have a job.”

Well, it is happening. Trump is cutting back on nearly every aspect of the federal government. Plus, he is stopping payment of some government contracts. If large numbers of federal employees are laid off, we may begin to see a downturn in the economy. Unemployed people will increase the supply of labor, and we may see a downturn in wages and salaries. The good news is that we have low unemployment now. We might be able to absorb all the skilled federal workers.

I predicted inflation and a downturn under Biden. The combination of Biden’s foot on the accelerator and the Fed’s foot on the brakes has worked out much better than I thought.

We now pay around a trillion dollars per year in interest. That interest money is going to people who can afford to buy government debt as an investment. Imagine spending a trillion dollars for people who need it.

Can the process be reversed? Can Trump put his foot on the brakes and the Fed put its foot on the accelerator? That might really be what tariffs are all about. Can we stimulate private employment to absorb the federal workers? We’ll see.

I think we’re likely to see a reduction in interest rates soon.

Think about your business. How will you respond? Do you deliver a necessity, or will people decide they can do without you? We may have to be creative.

Be careful what you wish for.