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.

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In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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