Quote:
Originally Posted by retiredguy123
Can anyone provide a logical reason why the Fed reduced interest rates by 0.5 percent? I watched several financial TV shows and got nothing but a bunch of gobbledygook.
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@retiredguy123, what you asked for —
Logical reason:
As an institution, the Fed’s fundamental goals are ‘moving the economy toward maximum employment and stable prices’.[1] These are long-term goals, not goals for the next five minutes.
Maximum employment — Lower interest rates lower borrowing costs for businesses, encouraging them to invest in growth (expansion, capital assets), and hire more people.
Stable prices — Lower interest rates lead to lower expected inflation, other things equal (see Fisher’s interest rate theory [2]). Geico cave man says: ‘high inflation bad, low inflation good’. Higher inflation leads to unstable prices and lower inflation leads to more stable prices.
This is what you asked for @retiredguy123. But this ‘logical reason’ business you express in multiple posts doesn’t make sense to ask unless you want philosophy. I assume you don’t. Logic is philosophy (lots of philosophers around) and math (not many mathy folks around). But economics isn’t about logic. It’s about empirical evidence, analysis, and policy making. You want empirical evidence, not logical reasoning, right? I suggest in the future you ask for ‘sound reason’ instead of ‘logical reason’. Sound reasonable?
The logical reason you hear ‘gobbledygook’ on TV about the Fed’s policy decision is that is what TV does — sell advertising from more viewers who want entertaining. TV talking heads are often entertainers creating lots of noise, having a low signal-to-noise ratio. @retiredguy123, if you actually want to learn more you this, subscribe to The Economist and read it. You won’t learn much about it from TV channels and social media.
[1]
The Fed Explained - Monetary Policy
[2]
Fisher equation - Wikipedia