Flying Pink Unicorns

Today the fed cut short term interest rates by 3/4 of a point, or 75 basis points. I am still in SHOCK that they moved so much. I STRONGLY approve of this move, and have advocated sharp interest rates cuts for a while now (though too damn lazy to post to the blog on this, to my shame!)

The TIMING of this move was to support the markets. The markets in Europe and Asia plummeted yesterday and today, and panic must have been setting in at the fed. But this move (or at least 50 basis points) was surely coming at the scheduled meeting next week in any event. But by rushing this through between meetings, the fed told the markets (1) we get it, the economy is in recession, and we need to move and move big to stimulate a recovery and shorten any recession; (2) that interest rates will end up going even lower than they are now (had the fed not wished to signal this it would have implied that the downward part of the interest rate cycle is over. Instead, the fed in its statement implied the opposite.
http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm)

Changes in policy by the federal reserve act to change things in the real economy with a time lag of a bit over a year. The fed began cutting interest rates (easing) on September 18th.
http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm

So the effects of the federal reserve's interest rate moves should begin to be felt sometime late this year or early in 2009. This is depressing, but is a reality of monetary policy. The recession we are likely in is baked in the cake, and there's nothing the fed can do to prevent it, although it has now done a fair bit to ensure that it does not last too long.

Although it seems like the fed is behind the curve, compared to past economic cycles, the fed began cutting quite early in the economic downturn, and has cut quite substantially. The federal funds rate has been cut from 5.25% to 3.5% (1.75 points in total) in 4 months. That is quite brisk and substantial by historical standards. Bernanke cannot be criticized for timidity!!

The fed has moved so significantly despite the dollar's huge fall in recent months, and a bit of inflationary pressures, particularly from the sky-high oil prices. This tells me loud and clear that despite Bernanke's public happy talk (we expect slower growth but not recession) he expects recession, and is willing to risk higher inflation and a weaker dollar to ameliorate it. I'm just speechless with approval.