I hate to break it to you but INFLATION is alredy taken its grip on the economy. IF YOU NOTICE even fast food has gone up. THERE WAS NO NEED TO LOWER INTEREST RATES FURTHER.
AS Prices rise demand will decrese ADAM SMITH. BY lowering interest rate you are hindering the recovery Process. THE FED ALREADY LOWERED INTEREST RATEs. WHAT THE ECONOMY NEEDS NOW IS A BAIL OUT Plan for the mortgage crisis. THE middle class just needs targeted tax cuts and you will see the economy turn around in six months. THE FED IS ENCOURAGING SPENDING INSTEAD OF SAVING. WE NEED TO LET THE CYCLE TAKE IT"S COURSE IF NOT THE COLLAPSE WILL BE DEVESTATING.
ROBERT J. SAMUELSON | JUDGMENT CALLS
The Fed Doubles Down
Why Ben Bernanke's betting rate cuts won't create inflation.
Denny Henry
/
EPA-Corbis
Federal Reserve Chairman Ben Bernanke
Jan 31, 2008 | Updated: 4:10 p.m. ET Jan 31, 2008
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Federal Reserve Chairman Ben Bernanke has upped the ante on his big bet. On Wednesday the Fed cut interest rates for the second time in nine days, reducing the overnight funds rate to 3 percent, down half a percentage point following the three-quarter point cut of last week. The back-to-back cuts are a clear sign that Bernanke is less concerned with threat of inflation than he is with the slowing economy and the ailing banking system.
There's no longer any pretense about fighting inflation. In its statement the Fed said that financial markets "remain under considerable stress" and that recent economic indicators showed "a deepening of the housing contraction as well as some softening in labor markets." As for inflation, it was expected "to moderate in coming quarters."
Well, it hasn't yet. In general the Fed would like inflation in a range between 0 and 2 percent. But for all of 2007 the consumer price index was up 4.1 percent; even without rapidly rising energy and food prices, the increase was 2.4 percent. On the morning of the Fed's rate cut, the Commerce Department released preliminary gross domestic product figures for the fourth quarter. For the entire GDP—the economy's output of goods and services—prices were up 2.6 percent. Prices for consumers were up 3.9 percent. (The broader measure also includes prices for government and business purchases, as well as exports.)
Why is Bernanke turning a blind eye to inflation? He's not, really. Instead he's betting that a sluggish economy in the first half of 2008 will spontaneously dampen price pressures while also justifying the Fed's focus on the financial system and economic growth. The GDP is, after all, a real concern. In the fourth quarter the economy almost came to a halt: GDP increased at a meager 0.6 percent annual rate.
What seems to worry the Fed more than anything is the crippling credit crunch that's hit the financial system—notably banks, investment banks and the buyers of bonds—due to the large losses on subprime-mortgage-backed securities. That bad debt has seeped its way into the nooks and crannies of the financial system and choked off new lending to businesses and households. Without affordable credit the economic downturn could deepen and even be prolonged. "If you listen to banks," says Mark Zandi of Economy.com, "they're concerned that losses on mortgages are broadening to consumer loans and small business loans."
The Fed's remedy is to provide cheaper credit to the banking system in the hope that this will replenish banks' depleted capital and stimulate more lending. The lower Fed funds rate could help in two ways:
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