A Rouser from the Fed

December 21, 1991

On Thursday morning, this newspaper urged the Federal Reserve Board to make its next cut in the discount rate a "rouser -- one that will produce real savings on interest costs for the Treasury and encourage industry to increase its anemic investment plans." On Friday morning, the Fed came through. Its rousing 1 percent slash in the discount rate to 3.5 percent -- the lowest in 27 years -- was precisely the kind of jump-start the faltering economy needs.

There is no assurance that this will turn around an economy in which overwhelming debt -- private, corporate and public -- is stifling consumer confidence, restricting government pump-priming and discouraging business expansion. Incremental interest reductions through the course of the present recession have been noticeably ineffective in checking the downslide. But the Federal Reserve's first full percentage-point cut in a decade is of a magnitude that could make a difference, especially in reducing real long-term interest rates to a stimulative level.

If successful, the Fed's dramatic action might deflect mounting political pressure for a quick-fix, election-year tax rebate that might boost consumer spending a little but would do nothing to fix the nation's long-term problems. Indeed, such a gimmick would instantly act as an upward pull on both interest rates and the inflation rate. At only 2.1 percent, the current inflation figure is giving the Fed the leeway it needs to use monetary policy as a weapon to fight recession. Past irresponsibility by the executive and legislative branches forecloses any turn to fiscal adrenalin that would not have adverse effects.

So we applaud the Fed's action even though it, too, has its dangers. The German central bank has just raised its interest rates, a move that could draw capital into Germany and out of the U.S. at a time when a projected $362 billion deficit for this year leaves this country dependent on considerable foreign financing. Rather than increase this deficit with a quickie one-shot tax cut, the government should juggle its operations to put more stress on jobs-producing public works. In a trillion dollar budget, there is plenty of room for improvement to augment a Federal Reserve move that should encourage home buying, retail sales, the construction of business plants and equipment and the purchase of autos and other large durable goods.

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