Quicker Is Better for Fed Action

Most forecasters and financial market analysts think Federal Reserve policymakers will conclude today that the U.S. economy faces a greater risk of recession than of inflation and will begin cutting interest rates as early as January. This is good, but even better would be a small, immediate rate cut. Precisely because it is not uniformly anticipated, a quarter-point cut right now would give the economy a useful jolt, especially if accompanied by a statement expressing both caution and the Fed’s confidence in the essential soundness of the economy.

As Federal Reserve Chairman Alan Greenspan said earlier this month, the economy has lost enough momentum to raise worry about an excessive slowdown in consumer and business spending. To analysts this is a strong signal that members of the Fed board now see a “hard landing” as a greater danger to the economy than inflation.

The Fed has the unenviable task of balancing its interest rate policy so that while keeping inflation in check it does not throttle economic growth. It has moved the economic levers with skill over the last few years, cutting rates when economic growth was threatened by financial crises in Asia and Russia and jacking them up when the economy overheated.

Since last spring, the American economy has slowed precipitously. The annual growth rate of the gross domestic product plunged from 5.6% to 2.7% over the last two reported quarters, while consumer and corporate spending--which account for more than 80% of the economy--is down and expected to continue sliding. Profits are growing at less than half the expected rate, depressing stock markets.

Though inflation is running at a higher annual rate than last year, it is now at a near halt. The consumer price index rose 3.5% from January to November, compared with 2.7% last year, but the 0.2% increase in October and November means prices are on track for the slowest quarterly increase in almost two years.

The Fed helped engineer the current economic slowing through a series of rate hikes that brought U.S. interest rates to nine-year highs. Now, with the slowdown beginning to look a little too much like a slide, the Fed needs to shift quickly into reverse.