Rate Cuts May Have Backfired, Started Recession Fears: Economist

Nobel prize winner Robert Shiller takes issue with the U.S. Federal Reserve’s rate cut in July because of the psychological harm it caused the markets.

"I think that there is a problem with cutting rates because it shows a sense of alarm," Shiller told the media on Tuesday.

In July, concerns about global economic uncertainty helped spur the U.S. central bank to cut interest rates for the first time since the 2008 financial crisis. After a 25-basis-point reduction in the overnight lending rate, Fed Chairman Jerome Powell said "implications of global developments for the economic outlook as well as muted inflation pressures" contributed to the Fed’s decision.

Shiller said the Fed’s decision to lower rates was less about the actual cut but more about the psychological impact of casting recession worries on the markets.

"The import thing is the narrative that they’re beginning. So when [investors] saw the rate cut for the first time in years, the 25 basis points doesn’t mean that much, it’s more that they launched a new regime and that they’re worried about a recession," the Yale School of Management economics professor said.