Christmas Gift to the Economy : Why the Fed should lower interest rates another notch

The economy is beginning to resemble a patient with many more ailments than any one doctor can keep track of. The question seems not to be whether there will be a recession but whether it will be a deep one and a long one. Predictions of a severe economic winter are so commonplace that the rare economic optimist is wisely staying indoors and keeping his curtains closed to avoid ridicule.

What must be kept in plain view through all the doom and gloom, however, is the nation’s ability to control its fate. To a greater extent than in the past, the nation possesses the tools to try to direct the economy out of its current malaise. One such tool involves lowering either the discount rate or the federal funds rate. The latter was lowered a quarter point late last month.

Lowering either one would help.

It would help stimulate a lethargic economy, make new funds available to investors and consumers and provide a welcome psychological boost. The argument against a lowering is that it would contribute to inflationary pressures. Indeed, the fear of fueling inflation is always one of the reasons, if not the main reason, the Federal Reserve in recent years has held back and resisted calls to lower interest rates.

That’s the responsible posture, but in the current economic climate soaring fuel costs are contributing to inflation, yet little else is. Alan Greenspan, chairman of the Federal Reserve’s board of governors, must understand that it would be prudent to lower rates a quarter point. That won’t cure the economy’s many ills, but it won’t worsen the fever by denying needed and readily available medication. Another quarter point downward would hardly be a euphoric drop, but along with the previous quarter-point drop, it would suggest a trend line of confidence and conviction.