Why Cut Rates When Things Are So Good?
-- June 3, 2003
Federal Reserve Chairman Greenspan left the door open for yet another interest-rate cut today -- lucky number 13 since 2001. At the same time, the Chairman seemed determined to convince everyone that the economy is turning around. Sounds like a mixed message to us. Why do we need to try to stimulate the economy if it's already turning the corner?
Greenspan said that recent economic statistics and the stock market's rally indicate the economy has "stabilized." Nice try. Then he admitted, "The acceleration has not yet begun," the Associated Press reported. He went on to say that the labor market remains "exceptionally" weak.
Greenspan also said that recently enacted tax cuts should help fuel the recovery. But then remarked "it's too early to get a fix" on the strength of the economy. That doesn't sound like a person who is confident that the economy is improving.
So what's really going on? Greenspan is putting on the most positive spin possible so as not to touch off another deflation-fear-fueled tremor in the markets.
Meanwhile, Greenspan says he sees little cost to the economy in protecting against deflation. And he says he sees the risk of deflation hobbling the U.S. recovery as a "low-probability event." If that's the case, why is he saying that the US central bank feels it necessary to begin a "dialogue" with policymakers on deflation risks?
Our translation of the Chairman's remarks: We need to stop deflation at any cost. And we'll cut rates down to zero to do it.
The problem: The Fed has already lowered rates 12 times and the deflation wave is still bearing down on US shores.
related article: Greenspan Raises Issue of Rate Cut