The Fed Doubles Down
Why Ben Bernanke's betting rate cuts won't create inflation.
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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Member Comments
Posted By: eddiewhere @ 02/01/2008 1:58:25 AM
Comment: 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.
Posted By: eddiewhere @ 02/01/2008 1:53:06 AM
Comment: By: eddiewhere @ 01/23/2008 1:24:23 AM
Comment: : Sometimes we have to let PRICES RISE it is a healthy thing. A Person who never gets sick can never build up an immune system to fight future more devestating viruses. It is not good to get sick all the time but it part of our biological developmet. PRICE CONTROLS ARE BAD WHY? Any price control below market rates and/or the expenditure of national savings (financial reserves) to hold down monetary devaluation are inflationary. Price controls and the expenditure of financial reserves subsidize inflationary levels of demand and prevent increases in supply. They make it much more difficult - much more painful - to bring inflation to a halt and restore healthy and sustainable economic growth.
Monetary inflation is a TAX used by governments to expand the money supply and transfers wealth from its people to itself.
Even when there is little "price" inflation, stable prices just mean that governments, by printing more money or otherwise expanding the money supply ("monetary inflation"), has appropriated for itself all the benefits of each year's increase in productive efficiency.Therefore the measures used to hold down price increases are actually additional forces or causes behind inflation, that will cause even further price increases in the future.
"Our country is too large to have all its affairs directed by a single government. Public servants at such a distance, and from under the eye of their constituents, must, from the circumstance of distance, be unable to administer and overlook all the details necessary for the good government of the citizens; and the same circumstance, by rendering detection impossible to their constituents, will invite public agents to corruption, plunder and waste." --Thomas Jefferson to Gideon Granger, 1800. ME 10:167
"I consider the foundation of the Constitution as laid on this ground: That "all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people." [X Amendment] To take a single step beyond the boundaries thus specifically drawn around the powers of Congress, is to take possession of a boundless field of power
Posted By: eddiewhere @ 02/01/2008 1:24:07 AM
Comment: 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.
Sometimes we have to let PRICES RISE it is a healthy thing. A Person who never gets sick can never build up an immune system to fight future more devestating viruses. It is not good to get sick all the time but it part of our biological developmet. PRICE CONTROLS ARE BAD WHY? Any price control below market rates and/or the expenditure of national savings (financial reserves) to hold down monetary devaluation are inflationary. Price controls and the expenditure of financial reserves subsidize inflationary levels of demand and prevent increases in supply. They make it much more difficult - much more painful - to bring inflation to a halt and restore healthy and sustainable economic growth.
Monetary inflation is a TAX used by governments to expand the money supply and transfers wealth from its people to itself.
Even when there is little "price" inflation, stable prices just mean that governments, by printing more money or otherwise expanding the money supply ("monetary inflation"), has appropriated for itself all the benefits of each year's increase in productive efficiency.Therefore the measures used to hold down price increases are actually additional forces or causes behind inflation, that will cause even further price increases in the future.
"Our country is too large to have all its affairs directed by a single government. Public servants at such a distance, and from under the eye of their constituents, must, from the circumstance of distance, be unable to administer and overlook all the details necessary for the good government of the citizens; and the same circumstance, by rendering detection impossible to their constituents, will invite public agents to corruption, plunder and waste." --Thomas Jefferson to Gideon Granger, 1800. ME 10:167
"I consider the foundation of the Constitution as laid on this ground: That "all powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people." [X Amendment] To take a single step beyond the boundaries thus specifically drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition." --Thomas Jefferson: National Bank Opinion, 1791. ME 3:146