Editorial: Fed Should Cut Rates Again

With both the manufacturing and retail sectors signaling a crunch in December, and with more trucking and other transportation companies warning in January about rising losses as their customers retrench, the Federal Reserve should cut interest rates another half-point at the end of this month.

The Fed’s half-point rate cut on Jan. 3 was dramatic because it was not expected to come that soon or be that large. The cut prompted a heady reaction in the stock market, which soared that day after months of declines.

Then reality set in, the kind of harsh reality that many in the trucking industry have long warned about. Sudden euphoria quickly gave way to more evidence that a lot of economic damage has already been done. Since then, more news has emerged of bankruptcies, factory closings and freight haulers either hiking rates to overcome lost volume or warning that they are operating in the red.

When the Fed last went through a sudden round of cutting interest rates, in late 1998, it acted early enough and fast enough to calm worried financial markets and keep consumers confident about spending their money. No serious signs of a looming recession ever emerged.

This time is different. By the time late in 2000 that the Fed focused on how tough things had become, the factory sector was already contracting sharply and consumer confidence was weakening.

The declines didn’t happen overnight, and the Fed shouldn’t have been surprised. Trucking saw this coming for months, as shipments fell, used-truck values plummeted and operating costs soared for fuel and interest payments on equipment debt.

Prodded by the Fed and other government regulators, lenders have tightened their horns. Now, even with the central bank pushing more money into the system at lower rates, commercial banks are less willing to shell out new loans.

Now, the Fed has a lot to undo. It aggressively hiked interest rates from mid-1999 to mid-2000, then sat back while soaring fuel prices drove many truckers to park rigs and drove many businesses and families alike to tighten their belts. A falling stock market took its toll as well. The economy was plainly hurting.

Many watchers say they expect the Fed to cut rates by no more than a quarter-point at its Jan. 30-31 policy meeting. That is not enough. Even a half-point cut may not prevent a recession, or a severe slowdown that feels like one.

The Fed has already acted too late. Now it needs to avoid doing too little.