CRITICS HAVE accused the Federal Reserve Board of rigidly pursuing an anti-inflationary policy even as the economy was sinking into recession. Tuesday, the board signaled a welcome change. It cut the discount rate -- the interest rate banks pay when they borrow money directly from the central bank -- by one-half percentage point, which paves the way for lower interest rates across the board. That will give a desperately needed boost to spending and help revive a sluggish economy.
November figures on output and prices convinced the Fed it was time to shift gears. Unemployment jumped from 5.2 percent to 5.9, and industrial production slumped. And the latest figures on consumer prices show inflation had dropped to less than 4 percent annually. With inflation in check, the Fed is free to fight slumping production. Lower interest rates will stimulate corporate borrowing and spending, help revive a dormant real estate market and boost consumer spending.
What Tuesday's decision does not mean is that the Fed has abandoned its anti-inflation policy. To control inflation, it sets a target range for the growth rate of the money supply. For the past year, and especially during the past six months, it has kept the supply at or below the bottom of this range. That means it can now step up the money supply, thereby driving down interest rates, without overstepping its money-supply targets.
At a time when unemployment is rising and inflation is falling, there is little excuse for keeping interest rates high. The Fed's decision to stimulate spending without accelerating inflation is an unambiguous victory for the economy.