Why a Fed rate cut makes sense

[written with Mark Zandi, chief economist of Moody’s Analytics] This is a post about one-quarter of one percent. That’s the amount by which the Federal Reserve is expected to reduce the federal funds rate, the key interest rate they control, when they meet at the end of this month. If that sounds like too small a change to get worked up about, we assure you, Fed rate changes can be a big deal, especially when they change direction. The central bank had been steadily raising rates over the past several years, and only just a few months ago was predicting further rate increases this year and next. The decision to cut rates has become a bit more complicated, as last week’s solid jobs report weakened the case for the cut. Why add interest-rate stimulus to an economy that’s already going strong? Moreover, this month, the current economic expansion—meaning the time between the end of the last recession and the start of the next one—became the longest on record. Based on growth rates compared to past downturns, it has been more long than strong, but the unemployment rate has been hovering near 50-year lows, and the combination of abundant job creation, low inflation, and better wages have powered that ever-acquisitive creature, the American consumer. Given that our GDP is 70 percent consumer spending—in Europe, it’s 55 percent; in China, it’s 40 percent—the strong labor market can go a long way toward sustaining the expansion. So, again, why cut rates? First, […]

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