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Fed should follow markets, cut rates

Federal Reserve Chairman Jerome Powell and his colleagues at the central bank should follow the example of declining bond yields and lower short-term interest rates, economist Art Laffer told CNBC.

"I think it's in the cards," said Laffer, a former economic adviser to presidents Donald Trump and Ronald Reagan, and known for the Laffer Curve, a theory that basically argues that raising tax rates beyond a certain point becomes counterproductive to increase tax revenue.

The bond market signals an increasing likelihood that the next move by the Federal Reserve will be a reduction in the cost of borrowing money as the year progresses, jumping to almost 70% probability for the policy meeting of the Federal Reserve. central bank in December. In 2018, the Fed raised rates four times to an objective range of 2.25% to 2.5%.

The yield on 10-year Treasuries, which traded around 2.43% on Tuesday morning, has fallen almost 10% since the beginning of the year, as the S & P 500 index, even with the recent hit China's trade tensions, increased 13% in 2019.

"The Fed has always followed interest rates [in the bond market] I did not guide them, "Laffer said in an interview in" Squawk Box. " I think the possibility of a reduction is quite high. "

Co-author of the book, "Trumponomics: Inside the America First Plan to revive our economy," Laffer believes that the Fed should not worry about fueling persistently low inflation by allowing the economy to continue growing without restrictions.

"It can have a very strong economy with low interest rates," Laffer said, in contrast to the Fed's thinking over the years that robust growth increases price pressures. Historically, as part of its dual mandate to control inflation and maximize employment, the central bank has used higher interest rates to prevent the economy from overheating.

However, Laffer admitted that "inflation is not easy to understand." He said he was "totally wrong" about a decade ago when he predicted that inflation would rebound due to the Fed's long easy money policies aimed at boosting economic growth after the 2008 financial crisis and the subsequent Great Recession.

On Friday on CNBC, the co-author of & # 39; Trumponomics & # 39; of Laffer, Conservative expert Stephen Moore, also argued that central bankers should cut rates.

Moore, who earlier this month under pressure removed his name from President Donald Trump's consideration for a Federal Reserve board nomination, also believes that the Fed should not worry about stronger economic growth that causes inflation outside. of control. "This is what my everything [Fed] The campaign was about to see growth do not cause inflation, "Moore said.

In early May, less than a week after the first quarter gross domestic product showed an advance of 3.2%, the Fed voted to keep rates stable. Fed chairman Jerome Powell, at his press conference after the meeting, seemed to put cold water on a rate cut, calling the factors that made inflation lower "transitory."

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