Moore: 'Federal Reserve should cut interest rates'

The Federal Reserve should immediately cut interest rates by half a percentage point. Stephen Moore, candidate for the central bank's governing council, said this in an interview with the New York Times. As an economic adviser to Trump, Moore has mainly made a name for himself with fiscal stimulus plans, but he now also wants to exert more influence on monetary policy.

Moore has been a vocal opponent of the Federal Reserve's last two interest rate hikes, which were in September and December last year. That latest rate hike even infuriated him and President Trump, he said in the interview. He disagreed with the rate hike, as commodity prices were on a downward trend. As a result, there was no need to push through another interest rate hike at all.

Aligning interest rates with commodities

According to Moore, the Federal Reserve should align its interest rate policy more closely with the price development of commodities, such as oil, metals and agricultural products. According to Trump's former adviser, commodity prices give a good indication of inflation. The central bank should therefore pay more attention to the price of commodities for its interest rate policy.

Currently, the Federal Reserve aligns its interest rate policy with core inflation, which excludes the cost of food and energy. This inflation rate is less volatile, but is less representative of actual inflation due to the omission of two important cost items. Higher prices for energy and food have a direct impact on Americans' purchasing power, but are not immediately visible in the inflation rate that the central bank is looking at.

Interest rate reduction necessary?

Still, many economists doubt that Moore's approach will result in better monetary policy. In 2008, commodity prices went through the roof, while a recession was already on the way. If the Federal Reserve had aligned its interest rate with commodity prices at that time, it would have had to raise interest rates at that time. In that case, the crisis might have hit even harder. The same can be said for the period 2010-2011. Commodity prices climbed back up from the depths of the crisis. That would mean that the central bank should have raised interest rates back then, while the economy was just emerging from the crisis.

Moore argues for an immediate cut in interest rates, but he is not the only one keeping this option open. According to Janet Yellen, the inversion of the yield curve may be a signal that there may be an interest rate cut is needed. That would mean a loss of face for Fed Chair Jerome Powell. He has structurally raised interest rates since becoming chairman. Below is an interview with Stephen Moore at Bloomberg.