The American economy under Trump has been very different from the economic cycles of the past several decades. It is growing within the inflation target of 2%. It has been incessantly creating employment, keeping the unemployment rate at or close to the historical low of 3.7%. There is no visible indicator prompting the Federal Reserve to manage the economy based on the old policy and practice. If it continued to do what it has been doing for more than a year, it will engage in actions very inapt from the new reality and will not only result in economic outcomes very diffident form the appropriate but would seriously disserve the American people.
The current stock market activity is being mainly influenced by the growth that is occurring due to the business activity as a result of the enhanced economic growth produced by the renegotiated trade and international agreements. It would naturally cause the GDP to grow at a historically higher rate. Controlling it to remain at the rates of the past by increasing the cost of capital for business by raising interest rates would cause an irreparable loss to the country. American corporations will not be able to bring back home the economic activity that we lost long ago. If it actually failed at that, our economic production will remain at a rate lower than our consumption. Our dependence on imports will continue.
Before using interest rate increases to thwart economic activity or asset valuation, the Federal Reserve should take into account the resultant fundamentals of the new stock market. It is operating very efficiently by producing historically low multiples of share price-to-earning and high return to investors for taking the risk. These are normal because of the growth due to the new economic activity. Something like this has not happened in decades. To serve the nation, the Federal Reserve has to operate within this new reality.
(The Author is Professor at Stillman School of Business, Seton Hall University in South Orange, New Jersey 07079. He can be reached at [email protected]; Office Tel: (973) 761 9684; Cell: (908) 917 8999. )