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!
