Play Live Radio
Next Up:
0:00 0:00
Available On Air Stations

The Fed Is Cutting Interest Rates. Why That Matters


Now we're going to turn to this week's other big economic news story - interest rate cuts. Earlier this week, the Federal Reserve cut interest rates for the first time in more than a decade. Federal Reserve Chairman Jerome Powell said the decision was made in light of slow global growth and trade tensions. The stock markets tumbled a bit, and President Trump complained the rate cut didn't go far enough.

We wanted to talk more about this, especially the reaction to the rate cut and why it matters, so we've called Gary Richardson. He's a professor of economics at the University of California, Irvine. He was also the historian for the Federal Reserve system from 2012 to 2016.

Professor Richardson, thank you so much for joining us.

GARY RICHARDSON: Thank you for having me on.

MARTIN: The cut itself was a bit of a haircut - you know, not that big of a change. But in a press conference after the decision, Federal Reserve Chairman Jerome Powell named weak global growth and trade tensions as some of the reasons behind the Fed's decision. So is the significance of this less the rate cut itself the what it says about where the Fed thinks the economy's going?

RICHARDSON: For sure that's a big concern. The Federal Reserve has generally better information about the economy than most of the public, and they have a lot of experts there - they're trying to predict the future. And the Fed is acting now as if we're in a recession.

MARTIN: And why do you think the stock market reacted as it did?

RICHARDSON: Well, the signal I got from this is that the stock market is thinking that the Fed is telling us a recession is coming. There's a lot of potential signals of recessions out there right now, and the Fed is acting as if we're in a recession and taking the policies to counteract a recession. And I think a lot of people took note of that.

MARTIN: And at the same press conference, Chairman Powell said that we are in a, quote-unquote, "mid-cycle" adjustment. What does that mean?

RICHARDSON: It's a new phrase. But basically, when they say the middle of the cycle, that means the peak of the cycle, right? The cycle goes up, and then it goes down. So they're saying we're kind of at the peak, and after the peak usually comes a contraction. So the question is, how long is the peak going to last, how long they can sustain the - kind of the peak of the boom before the economy shrinks.

MARTIN: I think there's been a lot of talk about whether President Trump's jawboning. I mean, he's been complaining for some time now that he feels that the Fed isn't doing enough to stimulate economic growth. Is his jawboning relevant here?

RICHARDSON: By law and not to the Federal Reserve, all presidents complain about the Fed, either in public or in private. Many have complained about the Federal Reserve much worse than Donald Trump. But Congress has told the Federal Reserve's leadership and the Federal Open Market Committee, you must ignore that by law.

MARTIN: Well, that's good to know, so thanks for clarifying that. So if people don't follow economic news closely, what should they be paying attention to as this story continues?

RICHARDSON: If you're thinking about refinancing your house, you might want to wait. The Federal Reserve is signaling potentially big problems, which usually means a series of rate cuts. For, like, businesses, there's a bunch of things to be concerned about. One is the Fed is signaling they're worried about the future. They might have information that a recession's really here.

Another is that they may be signaling that they've changed policies. In the past, the Federal Reserve would wait to cut interest rates until they knew for sure we were in a recession. Now they're cutting interest rates when we don't - it's not clear we're in a recession. This could be a policy that leads to kind of more stability, right? If we're - head off recessions. But also, it leads to a lot more risk. If the Federal Reserve stimulates the economy, but there's not a recession, then the economy can get overheated, and the eventual contraction is going to be a lot worse.

MARTIN: That is Gary Richardson, former Federal Reserve System historian and professor of economics at the University of California, Irvine.

Professor Richardson, thank you so much for talking to us.

RICHARDSON: Oh, thank you. Hopefully it will be useful.

(SOUNDBITE OF ED SHEERAN'S "I SEE FIRE (KYGO REMIX)") Transcript provided by NPR, Copyright NPR.