The Fed cuts again – So what?

President Harry Truman once quipped he would really like to find an economist with only one hand. He went on to elaborate: "Give me a one-handed economist. All my economists say, 'on one hand...', then 'but on the other...'"

That statement bears on the December 9-10 meetings of the Federal Open Market Committee (FOMC) of the Federal Reserve Board. This session resulted in cutting the federal funds interest rate by 25 basis points, or 0.25 percent, to a target range of 3.50 percent to 3.75 percent.

This brings interest rates down to their lowest level since 2022, when the economy overall was more troubled than today.

Fed meetings rightly are held in private, but reliable information, including public statements by Fed governors, indicates that this time around there was a comparatively large amount of dissent, including some supporting holding steady with no changes and others backing a greater reduction.

Available data indicate softness in employment, signaling a slowdown with growing numbers of idle people who want to work, but inflation remains vexing. Inflation concerns normally would argue for not cutting rates, which customarily would encourage inflation.

Stock market prices are currently volatile, with declines now concentrated in recent high-flying tech sectors. Higher interest rates favor savers and long-term investors, but the stock market today has evolved into a principal depository for retirement savings of Americans. Attitudes were very different for many years after the 1929 global market crash.

Powell and colleagues must weigh a myriad of conflicting information.

President Donald Trump is characteristically inserting himself into the discussion, including attacking Powell for being too cautious. Powell's term ends next May, and Trump will nominate his successor.

Yet presidential interference with the Fed is nothing new, though Trump's style is distinctive.

What is relatively new is our focus on Fed policy decisions to the general neglect of the fiscal—taxing and spending—actions of our federal government.

Previously, fiscal policies were emphasized. In 1958, Professor William Phillips of the London School of Economics identified an inverse correlation between inflation and unemployment, traceable decades back in British data.

The Phillips Curve was seized upon in the United States—though not in more restrained Britain. Democrats, notably Senator John F. Kennedy of Massachusetts, attacked the allegedly cautious, careful, and therefore ineffective Republican Eisenhower years.

Professor Walter Heller of the University of Minnesota, head of the Council of Economic Advisers in the Kennedy administration, compared managing the economy to driving a car. Hit the accelerator when the economy is slow, step on the brakes if inflation appears.

Truman, who established the Council of Economic Advisers, philosophically accepted differences of opinion. In hindsight, the ease with which JFK's economists abandoned caution was a warning sign.

The problem is human behavior, which evolves over time. Phillips had never presumed his correlation to be some sort of "law" of economics. The great John Maynard Keynes noted politicians usually prefer expanding, not reducing, spending.

By the end of the 1960s, inflation and unemployment were both rising. Presidents Lyndon Johnson and Richard Nixon proved unfortunate fiscal stewards. LBJ pressured the Federal Reserve and concealed the true costs of the Vietnam War. Nixon, in order to aid his 1972 reelection, literally threatened Fed Chairman Arthur Burns.

The oil price increases in 1973 and 1979 by the Organization of Petroleum Exporting Countries (OPEC) also fueled inflation.

Long-term, our economy is enormously successful. Give Powell some of the credit. 1929 RIP.

Arthur I. Cyr is the author of "After the Cold War—American Foreign Policy, Europe, and Asia" (NYU Press and Palgrave/Macmillan). Contact [email protected]