NCPA - National Center for Policy Analysis

Cutting Interest Rates

June 23, 2003

On June 24, the Federal Reserve's Federal Open Market Committee meets to set monetary policy. The conventional wisdom -- which is almost always accurate in this area -- is that the FOMC will cut the federal funds interest rate by at least 25 basis points (0.25 percent) and perhaps as much as 50 basis points, says Bruce Bartlett.

Federal Reserve Board Chairman Alan Greenspan has let it be known that he is still concerned about deflationary pressures in the U.S. economy, and believes that one last rate cut is necessary as an insurance policy to make sure that the burgeoning economic expansion continues. According to Bartlett:

  • There is a danger, however, that this rate cut may be one too many, tipping the economy over edge from beneficial reflation to harmful inflation.
  • Another problem is that if the Fed should come to believe that it has gone too far, it will be very difficult to reverse course because we are moving into a presidential election cycle.
  • Historically, the Fed has avoided making major policy moves during this period, lest it be accused of influencing the economy for political reasons.

Bartlett says the earliest the Fed could begin to tighten to counter an inflationary outbreak won't be until November of next year, after the election. At that point, the economic cost of a tighter monetary policy may be much greater than if such a policy were implemented earlier.

Source: Bruce Bartlett, "Cutting Interest Rates," National Center for Policy Analysis, June 23, 2003.

 

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