The Federal Reserve's expected rate cut won't necessarily stimulate growth and protect the U.S. economy from the threat of recessionThe Federal Reserve's rate-setting committee is widely expected to cut the target federal funds rate by a quarter percentage point on Dec. 11, to 4.25%, but it's not clear how effective the move will be in keeping the U.S. economy from sliding into recession.
Four years ago, an economist from the Federal Reserve Bank of St. Louis, Jeremy Piger, demonstrated the problem that's giving Fed Chairman Ben Bernanke and his crew such a tough time. Piger showed that it's a lot harder for the Fed to boost growth by cutting interest rates (as it seeks to do now) than it is for the Fed to slow growth by raising rates (as it tries to do when the economy is overheating).
Specifically, Piger found that in the two years following a one-percentage-point increase in the federal funds rate, quarterly GDP growth fell 1.21 percentage points. In the two years following a one-percentage-point cut in the funds rate, quarterly growth rose 0.53 percentage points.
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