President Trump needs to know about how rate cut really works
Trump may think he is doing the right thing. He thinks he is saving the economy. Reality is: the principles of economics may tell him the exact opposite. The whole idea of this article is simple — to break down the following chart: FED FUNDS RATE vs. INFLATION vs. EX-POST REAL POLICY RATE — THE MECHANISM The trap is simple: forcing rates lower does not guarantee easier conditions for long. If the Fed cuts while inflation is still persistent, the initial decline in real rates can stimulate demand and keep price pressure alive. That may buy lower rates today at the cost of a much harder adjustment later. Once inflation becomes difficult to contain, the Fed has to reverse course, push nominal rates higher, and hold them there while inflation falls. The result is the opposite of what the cut was meant to achieve: lower rates now, but a higher real rate later. On Friday, September
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