September 10, 2025

Policymakers and the public in general are concerned with the overall economic wellbeing. The question at hand is which of the different environments provides the most favorable economic environment consistent with this objective. To choose a particular state of the world as the most desirable one we need to specify the variables and criteria that depict economic wellbeing. The list includes Real GDP growth rate, inflation , the real stock market returns, bond yields, the real interest rate, and home affordability. A comparison of each of the variables in the two states of the world both on a contemporaneous basis as well as the one year ahead shows that the rising interest rate and rising real GDP comes out on top. These results lead us to conclude that this is the preferred state of the world. Unfortunately , sometimes the policymakers do not get to choose the initial conditions. They have to play with the hand that is dealt to them. The question then becomes what policies need to be adopted to generate the desired outcome. Quotes by President Trump and economists of different persuasion are clear as to what is the desired policy initiatives when confronted with a weak economy. The real GDP growth rate is slowing down and a reduction in interest rates seems all but certain. Yet , the historical experience points to a short-term decline in the T-Bill and T-Bond yields and a subsequent increase one year later will not necessarily produce the outcome the policy makers desire or intend to deliver. The reduction in yields will have a short-term positive impact on the real economy and the stock market but history suggests that stimulus will be short lived and last less than a year.

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