The Corner

Economy & Business

The Ammunition Theory in Monetary Policy

Alan Blinder, a former vice-chairman of the Fed (and the co-author of the basic economics textbook I read many years ago), concludes a column on the Fed thus:

The Federal Open Market Committee has now cut interest rates twice, by 0.25 percentage point each time, as “insurance” against a downturn. But there are no serious signs of recession; most forecasters see growth continuing near 2%. Nor can monetary policy undo the damage from tariffs. Nor does half a percentage point buy you much insurance.

There are reasonable arguments for and against cutting rates. So, unsurprisingly, the FOMC is divided. History may prove Mr. Powell and the Fed’s doves right—or wrong. For myself, I’d prefer that the Fed save its limited ammunition until they see at least a few whites of a downturn’s eyes. Then, by all means, fire away.

If a Fed cut today builds confidence that it is willing to do what it takes to prevent a recession, though, it should raise the neutral interest rate – which gives the Fed more ammunition. (The higher the neutral rate, the more expansionary any nominal rate is.) Is that what happened? Fed-funds futures markets suggest that the expected rates for 2020 have been rising over the last month. That may be an indication that the Fed has made the right move.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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