Does economy have a split personality?

Refrigerators in a New York City store. The Commerce Department said orders for durable goods in December jumped by 5.2 percent.

TEXT OF INTERVIEW

KAI RYSSDAL: You can get experts on either side of the argument to weigh in on whether we're in a recession yet or not, but what we seem to have here is an economy that can't quite make up its mind. Or, more accurately, consumers who can't decide. The Commerce Department reported an especially un-recession like number today. Orders for durable goods, expensive stuff like refrigerators and computers, jumped more than five percent last month. At the same time, though, we learned consumer confidence tumbled in January. Maybe we're buying more stuff to make ourselves feel better. But you frame all of that against the backdrop of tomorrow's interest rate announcement from the Federal Reserve and it only raises more questions about which way the economy's going. Marketplace's senior business correspondent Bob Moon is here to answer them.

Hi Bob. Seems to me it's not a matter of if the Fed cuts, but how much. My question to you then is how much does the Fed pull on interest rates in the wake of today's economic news?

BOB MOON: Well, if we can use that metaphor, you want to get the economy back in the saddle without pushing all of us all the way over to the other side of the horse. The betting on the futures markets right now is that the Fed is going to cut its benchmark rate by half a percentage point, down to three percent. Now that's a very interesting number because it just so happens that the Commerce Department tomorrow is releasing the inflation figure for the last quarter of the year. And if you factor out volatile food and energy costs, the consensus among leading economists is that it was probably running around two and a half percent. So we've got the prospect here of the cost of buying money maybe even being cheaper than the core inflation rate. Some economists say this is very risky business now. Will that just trigger another round of borrowing and spending again? And if you're lucky you might spur the economy, but you also might fuel inflation.

RYSSDAL: And you have to guess that the Chairman of the Fed has already seen that inflation number or has a good idea of what it's going to be. The question then becomes why would he take the risk of inflation?

MOON: It's very tricky. These monetary policy makers are looking at an economic threat on several fronts right now. You've got real estate values declining. You've got stock values declining. You've also got the prospect that the labor market is softening up and there's a real chance that real incomes could start declining. The last time that all three of those planets aligned was 1974, which happens to have been a recession year and you had the double whammy of inflation then, or stagflation, if you will. And there are signs of that every day. I don't know if you saw just yesterday -- Hershey is going to be raising the wholesale price of its candy bars by as much as 13%. It's the second price increase by Hershey in a year. That sort of news we're seeing every day.

RYSSDAL: What happens in the markets and the wider economy if the Fed does not come through with that rate cut tomorrow?

MOON: Well, Mr. Bernanke must be very mindful of warnings from a lot of stock market analysts out there that the market could tank again if there is no rate cut at all. That would just compound the economic slump. There are also some economists who say that the big three quarters of a percent rate cut that we saw last week really smacked of panic and they say it might even be inflationary. So the Fed might just stop now -- not do anything. Some say, well, split the difference. Maybe a quarter of a percentage point might be the trick here.

RYSSDAL: Oh, to be inside the mind of the Fed. Marketplace's Bob Moon. Thank you, Bob.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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