Federal Reserve Divided On Best Way Forward

The Federal Reserve helps decide American monetary policy. (Flickr)

The Federal Reserve released minutes from its September meeting on October 9, which showed broad consensus on the latest rate cut, but revealed a rift between economists and policymakers on long-term strategy. 

The Federal Funds rate is the target rate at which banks borrow from other banks, as set by the Federal Reserve. Lower rates generally stimulate the economy and lower unemployment, while higher rates slow the economy and keep inflation in check. 

During the 2008 Recession, the Federal Reserve lowered rates from 3.5 percent to 0.25 percent, where they remained until 2015. Between 2015 and 2018, the Federal Reserve raised rates incrementally from 0.15 percent to 2.4 percent. In response to worries over a recession, the Federal Reserve kept rates between 2.25–2.50 percent from December 2018 to August 2019. During their meeting in August 2019, the Federal Reserve decided to drop the target rate a quarter percent in response to recession anxiety.

At a meeting in September, the Federal Reserve dropped rates another quarter percent, citing “risks and uncertainty associated with international trade developments… and ongoing weakness in global economic growth.”

The current economic anxiety comes primarily from the effects of the extended U.S.-China trade war. According to the Wall Street Journal, nearly two-thirds of private-sector forecasters said the manufacturing sector is in recession. Trade disputes have harmed manufacturing, which is beginning to affect the overall economy. 

Although members agreed on dropping rates down to 1.75-2 percent, future uncertainties leave Federal Reserve members divided over monetary goals. The Federal Reserve’s uncertainty reflects larger questions about the economy after the 2008 Recession. Both inflation and unemployment are low, defying traditional economic models.  

Inflation has caused these recent discrepancies between economic theory and reality. For example, economic data has contradicted the Phillips Curve, a model highly regarded in economics, for the past decade. 

Politicians still hold on to traditional economic ideas. Across the ideological spectrum, politicians have pressured the Federal Reserve to keep rates low. In July, Representative Alexandria Ocasio-Cortez (D-NY 14th District) criticized the Federal Reserve for not cutting rates. Similarly, President Trump called the Federal Reserve “Pathetic!” in a Tweet on October 1.  

Politicians know what is at stake. The Federal Reserve’s actions will have profound consequences in the coming years. The United States is experiencing its longest stretch of economic growth in history. President Trump knows the economy will affect his re-election prospects, so avoiding a recession is one of his top priorities in the coming months.