The Fed will cut rates 75 or 100 basis points today. Full fledged, all out panic has set in at the Federal Reserve. The Fed's coordination of Bear Stearns' rescue over the weekend typifies the fear at the Fed that the problems in the credit markets will worsen, and that financial institutions may fail. This would be disastrous for a variety of reasons which I don't have time to go into right now.
The Fed has chosen to follow a course of action I have advocated, which is to cut rates to the floor, fast, flood the financial markets with money/loans as needed, and generally err heavily on the side of aggressive measures to limit the duration and magnitude of the recession we are now in, and protect the financial system from a disaster. I will go into much more detail in a post I've been meaning to put up for days explaining why an analogy to Japan's severe problems of the 1990s is badly inapt in discussing the United States' current problems. For now, I'll leave you all with this: the fed will cut rates at least 3/4 of a point today, which will leave the federal funds rate (assuming a 3/4 point cut) at 2.25%. Given that inflation is higher than that at the moment (by a fair bit), this means that in the jargon, real (inflation adjusted) short term interest rates will be sharply negative. This means that in terms of the economy the fed has the gas pedal to the floor and is pushing almost as hard as it possibly can to try and get the economy moving. This is, imo, exactly what the fed should be doing to mitigate the spread of the mortgage based credit crisis, inflation be damned, and the dollar be damned. This is an incredibly bold course of action, kudos to Bernanke. I think I'm in love!
2 comments:
Fed rates I know nothing about.
Will the Supreme Court rule 2nd Amendment is individual or collective right??
Dan is certainly correct that Bernacke is following his plan for the economy with ruthless dispatch.
Lowering interest rates well below the rate of inflation, flooding the credit markets with cheap and easy money, even bailing out a major IB, which is arguably beyond the scope of Bernacke's power.
Whether all of this is a good idea remains to be seen. I know that Bernacke was the leading academic economist of the great depression before taking the Fed job, so it's certainly possible he is doing it right.
On the other hand, I have my doubts. I will especially have my doubts if it turns out that Bailout Ben has taken a huge loss for the Fed that the US taxpayer will have to pay for.
Also, if Ben is going to be this bold, why not get on the record about what FISCAL policy we should be following? If he has any ideas about that, he has kept them off the record. Personally I would love to hear what he thinks about tax policy, the stimulous plan, and how much congress should be willing to allocate in emergency bailout funds.
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