The Federal Reserve’s decision to reduce the federal funds rate by 25 basis points to 4.25 percent will reduce the spread between short- and long-term interest rates and improve financial conditions.

Currently the fed funds rate is above the 10-year treasury rate, suggesting relative tightness in monetary policy. When short-term interest rates have persistently exceeded long-term rates in the past, the resulting inversion has often been associated with economic slowdowns and recessions.

Short-term interest rates have been above long-term interest rates for much of the last year. Despite this situation, the economy has expanded strongly in the last two quarters, but is expected to slow significantly in this quarter and the next as lenders tighten credit standards. On Wednesday, the Fed took appropriate action to reduce short-term interest rates closer to the levels of long-term rates, thus easing monetary policy.

However, the Fed should not have to bear the whole burden of dealing with a slowing economy on its own. Congress should act with tax legislation to increase expensing of business investment to boost capital spending. The Fed has reduced the cost of credit, and additional expensing for investment would be a complementary way to boost the economy