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Wed Sep 11, 2019, 06:46 PM Sep 2019

Trump's tweet on Fed, negative rates and debt is called a 'recipe for disaster'

President Trump triggered a swift and skeptical reaction with his demand Wednesday for the Federal Reserve to lower interest rates “to zero, or less” as part of a plan to reduce the financing costs of U.S. government debt.

“This is a recipe for disaster,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro in Washington. “If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.”

Independent central banks such as the Fed don’t set rates motivated by an urge to manage their national budget’s debt financing costs. They adjust the cost of borrowing based on what they judge will be best for the overall economy. In the U.S., the Fed has to pursue that through specific goals set by Congress: maximizing employment and containing inflation.

To be sure, interest costs represent a meaningful portion of the U.S. federal budget and are projected to rise at a worrying pace. Lower rates would ease that burden. It’s also a fair question to ask why the U.S., the safest haven for investors worldwide, should be paying higher rates than countries such as Japan and even Greece.


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