The Federal Open Market Committee has reduced its policy-controlled interest rates the federal funds rate target and the discount rate three times already this year, and if the majority of Fedwatchers are right, more rate cuts are in the offing. There are at least two reasons. Judging from the way they discuss monetary policy, many journalists, talking heads, and ordinary citizens believe that the Federal Reserve should keep cutting the federal funds rate until continued economic expansion is demonstrably assured. News of weak economic conditions, like the March labor report of further layoffs in manufacturing industries, convinces this audience that additional monetary stimulus makes sense.
Many economists adopt a different framework but still reach the same conclusion.
Experienced economists recognize that during a period when excess inventory needs to be worked down, manufacturing output and employment will be curtailed temporarily. Since monetary policy begins to affect economic conditions only after a lag, experts know that at some point an aggressive reaction to current economic conditions may turn out to be an over-reaction in the broader scheme of things. Those advocating hurried additional action cite signals that, in their opinion, suggest continuing weakness. Corporate profits in high-tech sectors have been particularly disappointing, and these industries were so important during the economy s long expansion phase that it is sensible to question how vigorous the future can be unless they get back on their feet. Investors have not yet shown confidence in these industries, fearing that it may take a while for demand to firm up and stabilize at higher levels.