The Fed Should Cut Interest Rates Soon

Narayana Kocherlakota thinks the Fed needs to respond to the coronavirus pandemic by reducing interest rates:

The outbreak has triggered a huge burst of risk aversion in financial markets. We should expect that risk aversion to manifest itself as a drag on household and business spending on travel and many other services. There is, of course, the possibility that this risk aversion continues to grow, creating its own negative dynamic: As consumers and businesses respond to alarming events, they pull back, causing growth to slow still more.

This cycle is why the economic threat from the virus is so unnerving. If the cycle develops, it would represent an adverse demand shock that will weigh on businesses’ willingness to hire and raise prices. The appropriate monetary policy response, of course, is to ease interest rates.

I think Kocherlakota is right—though perhaps not for the reason he outlines. At this point, we still don’t know how strongly the coronavirus outbreak will affect the US economy. It’s unclear if rate cuts are appropriate yet, and under normal circumstances I might favor waiting a bit longer before making a decision.

However, even before the outbreak there was a good case to be made for at least a modest reduction in interest rates. So even if the coronavirus outbreak turns out to have only a small effect on the economy, a rate cut is probably a good idea anyway. The added benefit of demonstrating that the Fed is willing to deal aggressively with a public health emergency is just gravy.

So yes: cut interest rates soon. The upside might be high and the downside is almost certainly low.

WE'RE TAKING A SHORT BREAK…

from the big banner at the top of our pages asking for the donations that make Mother Jones' nonprofit journalism possible. But we still have upwards of $300,000 to raise by June 30, whether we get there is going to come down to the wire, and we can't afford to come up short.

If you value the reporting you get from Mother Jones and you can right now, please join your fellow readers who pitch in from time to time to keep our democracy-advancing, justice-seeking journalism charging hard (and to help us avoid a real budget crunch as June 30 approaches and our fiscal year ends).

payment methods

WE'RE TAKING A SHORT BREAK…

from the big banner at the top of our pages asking for the donations that make Mother Jones' nonprofit journalism possible. But we still have upwards of $300,000 to raise by June 30, whether we get there is going to come down to the wire, and we can't afford to come up short.

If you value the reporting you get from Mother Jones and you can right now, please join your fellow readers who pitch in from time to time to keep our democracy-advancing, justice-seeking journalism charging hard (and to help us avoid a real budget crunch as June 30 approaches and our fiscal year ends).

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate