Fed cuts interest rates in December meeting: CEI analysis

The Federal Reserve today cut interest rates by 0.25 percentage points, a sign the board is wrangling with tradeoffs, say CEI economy experts.

Ryan Young, CEI Senior Economist:

“Cutting interest rates can help stimulate a slowing economy, but at the tradeoff of risking higher inflation. The Fed’s decision to begin growing its balance sheet again makes this gambit even riskier.

“Congress and the White House could make the Fed’s job easier with tariff relief and more policy certainty. Neither seems likely in the near future, even if the Supreme Court strikes down the president’s IEEPA tariffs, so the Fed will continue to try to steer between Scylla and Charybdis.

“The main point is that whatever the Fed does, there will be tradeoffs.”

Steve Swedberg, CEI Finance and Monetary Policy Analyst

“While the Fed’s interest rate cut is an understandable response to waning economic growth, policymakers should remain wary of this move due to excess money in the economy. 

“M2 money supply remains elevated, and the Fed’s balance sheet is still large by historical standards. If the Fed’s interest rate cut stimulates demand before excess liquidity has been removed from the system, it could retrigger inflation pressures akin to what we saw in the 2020-22 COVID era or the 1970s.”