Economy and Jobs Watch

This past week, the Federal Reserve Board (Fed) lowered a key interest rate, suggesting that the Fed is not confident about the quality of the “economic stimulus” in the recently passed tax cut package.

The 2001, 2002 and 2003 tax cuts, with a total bill of nearly $1.75 trillion, have been repeatedly touted, in part, as needed economic stimulus. For example, when announcing [1] the latest round of revenue reductions in Chicago, President Bush said, “This growth and jobs package is essential in the short run; it's an immediate boost to the economy. And these proposals will help stimulate investment and put more people back to work, is what we want to have happen.”

The Federal Reserve, however, does not seem to share this view. Last week, the Federal Open Market Committee (FOMC) voted to reduce interest rates by 0.25 percentage points to 1%, the lowest level in 45 years. Since the start of 2001, the Fed has cut interest rates 13 times.

In their most recent statement [2], the FOMC noted, “The Committee continues to believe that an accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, is providing important ongoing support to economic activity. … The economy, nonetheless, has yet to exhibit sustainable growth.”

By lowering rates, the Fed is implicitly voicing concern that the economy is currently, or is forecast to be, in poor condition. In addition, the Fed will only lower interest rates if it feels that there is not enough stimulus “in the pipeline.” The economy has seen no fundamental adverse shocks since the last time the FOMC met. In fact, declining oil prices after the war should help the economy somewhat. However, the employment situation shows no signs of improvement.

With this in mind, if the claims made about the tax cuts were true, then the Fed would not have seen the need to lower interest rates, since fiscal relief would already have been on the way. The fact the Fed is bringing interest rates ever closer to zero reinforces the notion that the tax cut was less about stimulus, and more about pursuing other, predetermined ideological goals, such as siphoning needed funds from government programs and repaying political supporters.