Rather than try to figure out which placebo will best assuage the delicate psychologies of day-traders, the Federal Reserve Board should announce it anticipates a long, long pause in any interest-rate manipulation.
In case you missed it, the Fed cut the federal funds rate Wednesday by 25 basis points, so it will now float between 2% and 2.25%. Nervous market analysts already were obsessing about what the Fed’s next move would be. The Dow Jones average dropped 333.75 points as investors sulked that the Fed didn’t promise even easier credit for the near future. As I write, though, the manic-depressives of the market are already rebounding, with the market back up 300 points less than 24 hours later.
It’s as if institutional investors are trying to read tea leaves sitting atop tarot cards inside cloudy crystal balls, after receiving inside scoop from the ghost of Jimmy the Greek. It’s a sorry spectacle, and it breeds market instability. While market instability does not necessarily equate to, or lead to, instability in the overall economy, it certainly can have that effect, and thus should be dissuaded.
That’s why the Fed should hit the pause button on all the foolishness. It should announce that its bias going forward will be to keep the current federal funds rate in place for the foreseeable future, unless truly major pressures build or developments occur to make the rate obviously untenable.
That way, investors can “price in” the rate with confidence and act accordingly, reacting to developments in the real economy rather than speculating on each inscrutable mind-change at the Federal Reserve. This also will have the effect of leaving in place a rate from which, if conditions truly do warrant a major shift, will allow the Fed leeway to move in either direction. If rates get too low, though, as the debt-happy President Trump keeps advocating, then the Fed will lose all ability to use interest rates to respond to another major economic slowdown.
Moreover, the following reminders are in order. First, a 2% federal funds rate is, by the standards of the past 75 years, already abnormally low. Second, the lower interest rates fall, the more people will have incentive to borrow and the less to save. As private and public debt both remain at or near record highs, this is an economically dangerous scenario.
Third, although inflation has been largely under control in the United States for more than 35 years, that doesn’t mean we can take price stability for granted. Let inflation back out of its box, and it can go on a horrendous rampage. Those hurt most by inflation are low-income workers, who can least afford it. Morally speaking, policy should err in their favor, not in favor of the go-go speculators in land and financial derivatives.
Fourth, almost all the serious economic risk lies on the borrowing side right now. With public and private debt so high and the federal government running trillion-dollar annual deficits as far as the eye can see — thus, by the way, crowding out private investment, among other ills — the danger of a debt crisis is greater than that of a conventional recession.
Therefore, when announcing a policy of steady rates going forward, Federal Reserve Chairman Jerome Powell should say that if lawmakers want lower interest rates, they would markedly help their case by rediscovering fiscal discipline. Such a verbal shot across the bows of both President Trump and Speaker Nancy Pelosi would be quite helpful.
