Failure driven Fed move?
January 25th, 2008 by Grant in: Economics, FinanceOn Monday the Fed dropped interest rates by a full 0.75% out of the blue. Unprovoked, unannounced, and unexpected, both in scale and timing. Sure, The Street had predicted a rate cut, but no one was predicting three-quarter basis points, and few were predicting an unscheduled cut.
There is something strange about this move.
Big Ben Bernanke has been fairly slow to react to economic data, and has at most taken a half basis-point chunk out of rates at any one time. So why the big bite all of a sudden?
I suspect that there is more to this interest rate cut than pure economic data. If economic data were the driving factor behind a proposed rate cut, the decision to cut interest rates could have waited until the next Fed meeting. After all, it takes months for the effects of an interest rate cut to trickle down to the driving forces behind the economic health of this country: the common Joe’s like you and I.
I suspect there was something much more critical behind this move. I believe that some major financial player, one that helps stimulate the economy, was on the brink of failure. Nothing demands more immediate action than running out of money.
I don’t know who it was, but it was a financial company who is worth more to this economy alive than dead.
Only time will tell who it was.
Tags: bernanke | Economics | Fed | interest rates
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January 27th, 2008 at 12:37 pm
I believe it was panic more than bailing out a company or fellow bank. They saw how poorly the international markets performed on Monday, and the Fed saw the futures were heading that way early Tuesday morning.
This Fed has no idea what it is doing. They are succumbing to the markets. The Fed is suppose to protect prices (manage inflation) and promote full employment.Unemployment is still low relative to historical average, and prices are heading higher. The inflation rate broke 4% last year. So lowering the Fed funds rate isn’t called for when prices look to rise and employment is currently stable. Even if the Fed wanted to claim it was lowering to prepare for a risk of higher unemployment, they wouldn’t need to do an emergency cut of this magnitude.
What really amazes me is the fact that the Fed is repeating the very mistake it made to create the credit bubble. Greenspan took rates way too low in 2003 and kept them too low too long. This created this fiasco we now face. But today’s Fed believes they can fix this problem by performing the very action that started the mess. Was it Einstein or Franklin who said the definition of insanity was performing the same actions over and over and expecting different results.
Bernanke will be a one term governor. He is in over his head.
January 27th, 2008 at 8:28 pm
I agree with you in part, Kirk. From the outside looking in, the Fed is trying to manage the stock market rather than the economy.
There may have been a bit of panic influencing the decision to cut rates, but I still think there is more to it than that. Time will tell.
I suppose you could say that Bernanke is in over his head, but he need not be. He can only drive the economy based on past economic data. Additionally, the Fed can’t vary interest rates fast enough to try to influence the stock market.
January 29th, 2008 at 10:56 am
Read this:
http://www.marketwatch.com/news/story/america-land-bubbles-next-pop/story.aspx?guid=%7B60CE4669%2D6814%2D4A48%2DA555%2DBE998EC6FC58%7D&dist=TNMostRead
Pretty interesting take on the current economy.