On June 24, the Federal Reserve's Federal Open Market Committee meets to set monetary policy. The conventional wisdom -- which is almost always accurate in this area -- is that the FOMC will cut the federal funds interest rate by at least 25 basis points (0.25 percent) and perhaps as much as 50 basis points.
Federal Reserve Board Chairman Alan Greenspan has let it be known that he is still concerned about deflationary pressures in the U.S. economy and believes that one last rate cut is necessary as an insurance policy to make sure that the burgeoning economic expansion continues.
There is a danger, however, that this rate cut may be one too many, tipping the economy over the edge from beneficial reflation to harmful inflation. Another problem is that if the Fed should come to believe that it has gone too far, it will be very difficult to reverse course because we are moving into a presidential election cycle. Historically, the Fed has avoided making major policy moves during this period, lest it be accused of influencing the economy for political reasons.
If I am right, then the earliest the Fed could begin to tighten to counter an inflationary outbreak won't be until November of next year, after the election. At that point, the economic cost of a tighter monetary policy may be much greater than if such a policy were implemented earlier.
The Fed may be reasoning that this is the latest point at which it can ease monetary policy further without appearing to favor George W. Bush with a robust economy going into the election. Therefore, it must ease now or risk the chance that the expansion will be nipped in the bud without having the ability to ease further.
I hope the Fed is right. Certainly there are respected economists who agree. My friend Larry Kudlow believes that a robust expansion is now underway and that this will increase the demand for money. Therefore, an additional expansion of the money supply will not be inflationary at this time. Other economists point to the low rate of capacity utilization in the economy -- large numbers of unemployed, factories running at half speed -- and say that this, too, will prevent inflation from emerging again for at least several quarters.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
Be the first to read Bruce Bartlett's column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Arkansas: Female Democratic Gubernatorial Candidate Files Two Complaints Against Her Own Party | Daniel Doherty