Fed reduces interest rates by 50 basis points: CEI analysis

The Federal Reserve today cut interest rates by 50 basis points, the first rate reduction in over two years. CEI experts give their analysis on how this news will affect the economy and if the Fed’s new credit card regulation will inhibit inflation relief for consumers.

Ryan Young, CEI Senior Economist

“The Federal Reserve went for the big cut. The federal funds rate will go down by a half percentage point, rather than a quarter percentage point. By itself, this is not a big deal. The big deal is that the Fed is no longer focused solely on inflation.

“Even though today’s actions are small, they could mark a major turning point in America’s monetary policy.

“The Fed’s Open Market Committee meets every six weeks. They will likely make further cuts at its two remaining meetings this year. Those cuts can quickly add up and could undo the Fed’s hard-won gains on controlling inflation.

“Part of the problem is that the Fed has two jobs. One is to keep inflation low. The other is to keep unemployment low. These are both good goals, but they can contradict each other. The Fed can choose one, or it can choose the other. But it cannot choose both.

“Right now, it is trying to choose both. As a result, it risks getting neither inflation nor unemployment where it wants them to be.

“In order to get the post-COVID inflation back down, the Fed had to ignore the job market and focus only on inflation. High interest rates and tight money can get inflation down, but with a tradeoff: slower job creation and slower growth. That is why people were worried about the Fed sparking a recession by raising interest rates.

“With unemployment still in good shape but creeping up the last few months, the Fed is turning its eye to the labor market. It can stimulate job growth by cutting interest rates, but with the tradeoff of risking higher inflation.

“There are tradeoffs no matter what the Fed does. That is why it can have either low inflation or low unemployment, but not both.

“The Fed should instead continue to focus solely on inflation, which it is more than capable of doing, so long as Congress doesn’t pass more big spending bills. Monetary policy is a poor tool for job creation compared to the real experts: entrepreneurs.”

John Berlau, CEI Director of Financial Policy

“Today, the Fed’s interest rate cut is being hailed by many as pro-consumer. Yet any relief consumers may get from rate cuts won’t offset the destructiveness of a new regulation the Fed is proposing. The Fed’s new proposed rule amending Regulation II would slash the Durbin Amendment’s debit card interchange price controls by almost a third. If implemented, this rule would compromise quality and data security and shift even more debit card processing costs from retailers – including giant retail chains like Walmart and Target – to already struggling consumers. Even at current levels, the price controls under Reg II – implemented in 2011 — resulted in banks sharply reducing free checking for low-balance accounts and in debit card rewards virtually disappearing, as the bulk of the costs of processing debit cards shifted from retailers to consumers. The Fed should scrap its proposed rule and give consumers some breathing room.”