Milton Ezrati
These days, the Federal Reserve faces a balancing act on how to use its interest rate policy tools. Continuing inflation concerns have, for the time being, led monetary policymakers to hold off on further interest rate cuts. Fed policymakers may even regret the aggressive interest rate cuts of late last year.
At the moment, the economy is coping well enough, despite the absence of additional rate cuts. That is a good sign. It is, of course, comforting that the country appears to have avoided recession. But more than this, the economy’s ability to cope without further rate cuts speaks well of its fundamentals. In this sense, the interest rate picture is more than just a policy tool; it offers a guide to the economy’s needs. If the economy were unable to sustain growth without radical cuts, it would suggest that something was fundamentally wrong and serve as a call for additional measures beyond rate cuts, actions that directly address underlying economic fundamentals.
This second perspective on interest rates—as an indicator of economic health—grows out of the underlying link between rates and economic prospects. Because a healthy economy promises businesspeople attractive returns on investments and economic endeavor generally, they will happily pay high rates to borrow capital to take advantage of these attractive returns.
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