The Fed vs. the Recession

December 20, 1990

Judging the Federal Reserve Board by what it does rather than what it says, the Recession of 1990-9? is here and real and virtually official. By lowering its discount rate (the rate it charges member banks) to 6.5 percent from 7 percent, the Fed has moved aggressively to deal with "weakness in the economy, constraints on credit and slow growth in the monetary aggregates." Its reticence to switch emphasis from inflation-fighting to recession-fighting is now history.

Financial markets expect the federal funds rate (the Fed-set overnight rate banks charge one another) to drop at any moment to 7 percent and even to 6.75 percent from its current 7.25 percent rate. After that, consumers can expect lower interest rates on credit card accounts, home equity loans and other personal debt, although financially strapped banking institutions may hold back on dropping their prime rates until the turn of the year in order to boost their slim earnings.

Whether the latest Fed moves, along with some pumping up of money supply, will appreciably slow the economy's downspin is a matter of debate among the experts. The current recession is a mystery -- and a troubling one at that -- because it is primarily induced by the borrowing binges of the Reagan era that left financial institutions lacking the capital needed for recovery. There is little precedent for guessing its duration or severity.

The Gulf crisis remains the wild card though a downturn was already under way before the Iraqi invasion of Kuwait and it will have to run its course even if war can be averted. This complicates not only monetary policy under Fed control but fiscal policies that will be framed by the White House and Congress in the next budget battle.

Ordinarily, elected politicians like to turn to old-fashioned pump-priming -- lower taxes, more government spending -- to fight recessions. But with a huge debt-overhang limiting its options, the Washington Establishment may be reduced to hand-wringing and frustration. Given that situation, an easing of monetary policy makes sense.

Our national indebtedness was a long time in the making, the product of a feckless era, and will be a long time coming under control. The nation can take comfort, at least, in the prudent leadership of the Federal Reserve System.

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