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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SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

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