Nobel Prize winner Robert Shiller said the Federal Reserve’s July interest-rate cut caused unexpected psychological harm to investors.
“I think that there is a problem with cutting rates because it shows a sense of alarm,” Shiller told CNBC.
“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.
Shiller said the members of the Fed are “sensible” and there is a bit of “behavior finance in their thinking,” CNBC reported.
“They must be aware that the public looks at the news and reacts to that more then they react to a 25 basis point change in rates,” he said.
For his part, President Donald Trump said Sunday the economy is "doing very well" and dismissed concerns of recession, offering an optimistic outlook after last week's steep drop in the financial markets, the Associated Press reported.
"I don't think we're having a recession," Trump told reporters as he returned to Washington from his New Jersey golf club. "We're doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they're loaded up with money."
Larry Kudlow, Trump's top economic adviser, also played down fears of a looming recession and predicted the economy will perform well in the second half of 2019. In Sunday television interviews, he said that consumers are seeing higher wages and are able to spend and save more.
"No, I don't see a recession," Kudlow said. "We're doing pretty darn well in my judgment. Let's not be afraid of optimism."
A strong economy is key to Trump's reelection prospects. Consumer confidence has dropped 6.4% since July. The president has spent most of the week at his golf club in New Jersey with much of his tweeting focused on talking up the economy.
Meanwhile, a number of U.S. business economists appear sufficiently concerned about the risks of some of Trump's economic policies that they expect a recession in the U.S. by the end of 2021, the AP explained.
Thirty-four percent of economists surveyed by the National Association for Business Economics, in a report released Monday, said they believe a slowing economy will tip into recession in 2021. That's up from 25% in a survey taken in February. Only 2% of those polled expect a recession to begin this year, while 38% predict that it will occur in 2020.