The Fed Gets Schooled in Basic Economics

Every first-year economics student learns about the law of diminishing returns, which basically states that adding more of one factor to production will eventually yield lower incremental returns. That economic truism is being played out Wednesday in real time in the stock market, this time with the Federal Reserve as the student.

The steady march higher in the S&P 500 Index this year to a record high in late July was built on the Fed’s dovish pivot back in January. But even though the Fed has followed through and lowered its target for the interest rate on overnight loans between banks for the second time since July 31, equities were essentially unchanged on the day and are little changed since the first cut. This could all be a “buy on the rumor, sell on the news” type of event. Or perhaps it’s further evidence that markets are less confident that central banks have the tools to prevent a rapidly slowing economy. Whatever the reason, it should be concerning to Fed policy makers that their efforts to stimulate growth are failing to spark enthusiasm among stock traders, if only for the negative feedback loop it may have on companies and consumers. The Duke University/CFO Global Business Outlook released Wednesday showed that more than half of U.S. chief financial officers anticipate the economy will be in a recession within a year, with optimism at its weakest point since 2016.