That’s the reaction I got in late 1980s from one of my Wall Street contacts.

Armed with a reasonably good knowledge of economics, money and banking theory and some common sense, I argued that the U.S. Federal Reserve System (the Fed) had no reason to cut interest rates to please Wall Street traders.

At this writing (late Sunday evening, New York time), financial media, a reliable Wall Street relay, are repeating what I heard more than 30 years ago.

But this time, the traders’ message came with a threat that if they don’t hear what they want from the Fed’s forthcoming meeting in Jackson Hole WY, a “big selloff” of U.S. assets (savings that are driving American economic growth) would follow.

So, if you are waiting for news from the Fed next Friday (August 23) – relax.

Interbank liquidity (controlled by the Fed) is plentiful, the Fed’s effective federal funds rate is trading at 5.33% -- the midpoint of its target range of 5.25% to 5.50% -- and nearly all other money market rates are between 5.10% and 5.20%.

Patient and steady way forward

In fact, the Fed has already telegraphed its imminent policy easing to bring the federal funds rate to the 5% -- 5.25% interval – an implied rate cut of 25 basis points.

Wall Street gloves are always off when dealing with the Fed, but this sort of disrespectful pressure on a formally independent agency of the U.S. Congress is a big step over the line.

To an average American, however, that is par for the course in a fully functioning liberal democracy. Still, some respect for institutional decorum would be appropriate.

Be that as it may, the most important issue is that international investors are still showing confidence in the Fed’s monetary management.

The dollar’s trade-weighted index rose 3% over the last twelve months owing to a sustained foreign demand for U.S. assets.

Based on the latest data available (June 2024), foreign holdings of the U.S. Treasury debt increased 8.6% from the same period of last year to a total of $8.2 trillion. Among major investors, only China and Switzerland reduced their holdings for a total of $74.7 billion.

Interestingly, large BRICS member countries like India and Saudi Arabia added, over the same period, a total of $36.1 billion of U.S. Treasuries to their holdings. There was no change in Brazil’s holdings, while Russia held to a minimum ($44 million?) its exposure to dollar-denominated assets.

Too much of a good thing?

Domestic and foreign U.S. stockholders have also no reason to complain about the Fed’s policies. So far this year, they have been richly rewarded with the S&P 500 soaring 17.1%.

No wonder that Wall Street wants the party to keep going. That is normal, but a few questions may be in order.

First, how reasonable is it to ease the monetary policy at a time of an extremely expansionary fiscal policy with budget deficits of 8% of GDP and a record-high public debt of $35 trillion?

Under those circumstances, interest rate cuts would only be warranted in case of credibly sharp declines of government spending and/or tax increases.

Second, an explosive combination of monetary easing and a large fiscal stimulus will drive inflation up in an economy growing during the first half of this year at nearly double its potential and noninflationary growth rate of 1.6%.

Is that the Fed’s way of restoring price stability and “normalizing” the monetary policy?

Third, an open U.S. economy growing way above its physical limits will spur demand for foreign goods and services, boosting trade deficits and exerting downward pressure on struggling domestic import-competing industries.

Inevitably, the trade adjustment process will follow to tame inflation and return economic activity toward the country’s noninflationary growth potential. But that process -- and the pressures it creates -- will also challenge the position of the world’s key currency country whose net foreign liabilities soared to $21.3 trillion at the end of the first quarter 2024. That debt is currently growing at an unsustainably high quarterly rate of $1.4 trillion.

“U.S. deficits without tears” – with the dollar exchange rate system, and the dollar system with managed floating exchange rates – are matters of permanent debate ever since the inception of the Bretton Woods international monetary system in July 1944.

But the time for debate is over. The U.S. should lead the process to stabilize a dollar-based world economy by showing the way with its price stability, a well-balanced aggregate demand, and global flows of commerce and finance free of unilateral sanctions and judicial overreach.