The is the question that the NYT should have asked in its discussion of the prospect of stagflation: rising inflation coupled with slow economic growth. The reason that lower Fed rates may not promote growth is that the recent cuts in short-term rates have actually been associated with higher long-term rates. The deal is that investors seem to believe that lower short-term rates will led to a falling dollar and higher inflation, and therefore are demanding higher long-term interests. This means that when the Fed cuts short-term rates it is actually raising rates on mortgages, car loans, and other interest rates that important determinants of economic growth.
This makes the Fed's life far more complicated. It is not clear how it can best promote growth just now. One item is unambiguous: a growing spread between long-term interest rates and short-term rates helps out the banks. Banks borrow money short-term and lend long-term. That means that Fed rate cuts will be good for the banks, even if they don't do much to help the economy.
Unlike many news organizations, the Prospect has remained staunchly committed to keeping our journalism free and accessible to all. We believe that independent journalism is crucial for a functioning democracy—but quality reporting comes at a cost. From Trump’s threat to the free press to Musk’s influence on our democracy, there is too much at stake in 2025 to stop now.
We’re behind on our goal to raise $75,000 to continue delivering the hard-hitting investigative journalism you’ve come to expect from us. Your support helps us maintain our independence and dig deeper into the stories that matter most.
We need you to make a year-end contribution today. Any amount helps secure our future and ensure we can continue holding power to account.
