The Fed Poised to Move … Big

Bloomberg reports:

Traders predict the Federal Open Market Committee, meeting today in Washington, will lower the overnight lending rate by a full percentage point, based on futures prices in Chicago. That would be the biggest reduction since 1984, when Paul Volcker led the central bank, and would bring the benchmark rate down to 2 percent.

Yeesh.

UPDATE: Robert Murphy and Lee Hoskins plead for a stop to the rate cuts:

The Fed has abandoned the one thing it can truly control–the long-run increase in price levels–in a self-defeating attempt to keep the economy growing. A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year. The rate was then steadily ratcheted back up, reaching 5.25% by June 2006.

These actions first helped inflate the home-price bubble and then helped burst it. Naturally, there are many factors–and perhaps even villains–that helped create the housing bubble, but excessively low interest rates were surely a necessary ingredient.

Regardless of past mistakes, the Fed must now make the best of a bad situation. It must stop chasing the financial markets, and even the broader economy. Creating more dollar bills will not add to the nation’s wealth, or make workers more productive.

Indeed.

2 responses to “The Fed Poised to Move … Big

  1. I’m not a big fan of the rate cuts either, though I’m wondering if the Fed is intentionally trying to incite inflation as a means to slow down foreclosures in the medium term despite its mandate.

    I’m no economist, but would appreciate any insight against this thought.

  2. When the Fed lowers rates below the European rates, it weakens the dollar even more as the money traders try to capitalize on the difference.

    Yeesh Indeed.

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