« Comparing U.S. Interest Rate Adjustment Policies with those in the U.K. and the E.U. | Main | The First Bank Failure of 2008 »
January 22, 2008
Shot in the Arm or Shot in the Head? The President's Stimulus Proposal and the Fed's Dramatic Interest Rate Cut
This morning, for the first time in memory, the Federal Reserve's Federal Open Market Committee (FOMC) reduced the target federal funds rate 75 basis points in an action taken outside its regularly scheduled meeting. After this dramatic cut, the fed funds rate is at 3 1/2%. The FOMC also cut the discount rate 75 basis points to 4%. FOMC member and President of the St. Louis Federal Reserve Bank Bill Poole voted against this rate cut because he would have waited to consider this action at the regular FOMC meeting next week.
The Federal Reserve is clearly more concerned with economic stimulus than with the possibility of inflation -- although there are inflationary indicators as well. Lowering interest rates exacerbates inflationary conditions.
Link to Federal Reserve statement: http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm
As foreign stock indexes showed sharp declines last week and yesterday in response to fears the the U.S. subprime meltdown will lead to a U.S. recession with global impact, the Federal Reserve obviously intended to demonstrate that it will act decisively and in a substantial way to rescue the U.S. economy. But will this action achieve its intended result? This abrupt action could signal that the situation is worse than previously perceived and it could signal that the Fed is reacting in a panic rather than in a measured way.
On Friday, President Bush weighed in on the state of the U.S. economy with a call for immediate economic stimulus through a sizeable tax cut package that would take effect quickly. Foreign markets were not soothed by this plan.
The question of the day is whether these extraordinary measures by the Federal Reserve and the President will save the U.S. from recession -- or simply indicate panic and trigger inflation.
Link to White House statement: http://www.whitehouse.gov/news/releases/2008/01/20080118-1.html
(ag) Jan. 22, 2008, in Economy/Interest Rates
January 22, 2008 in Economy/Interest Rates | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/t/trackback/89778/25365034
Listed below are links to weblogs that reference Shot in the Arm or Shot in the Head? The President's Stimulus Proposal and the Fed's Dramatic Interest Rate Cut:
Comments
The question of the day is whether these extraordinary measures by the Federal Reserve and the President will save the U.S. from recession -- or simply indicate panic and trigger inflation.
If any of us could answer the question of the day with any degree of certainty, we'd be rich, instead of toiling in the fields of legal drudgery. IMHO, the Fed is a day late and a dollar short. The time for meaningful dramatic action by the Fed has passed.
Posted by: Kevin | Jan 22, 2008 11:37:02 AM
