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.
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The Fed Doubles Down
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First, it has created a "positive yield curve": short-term interest rates are lower than long-term rates. On Wednesday the rate on 10-year Treasury bonds was 3.7 percent, compared with the 3.0 percent Fed funds rate. Banks can borrow at the lower rate, buy T-bonds at the higher rate and profit from the "spread" between the two. The profits help replace lost bank capital. In December the yield curve was inverted. The rate of the 10-year Treasury (4.1 percent) was lower than the Fed funds rate (4.25 percent). Economist Brian Bethune of Global Insight estimates that major banks and investment banks have lost $130 billion on subprime mortgages and that only $30 billion has been replaced by new investment.
Second, the lower Fed funds rate automatically reduces rates on many bank loans—home equity loans, small business loans—that are tied to banks' "prime rate," which usually floats three percentage points above the Fed funds rate. Banks yesterday cut the prime to 6 percent; as recently as mid-September it was 8.25 percent. Lower interest rates ought to reduce future defaults and delinquencies; that would strengthen banks' financial condition and encourage them to make new loans. Lower short-term rates would also cut rates on some adjustable rate mortgages (ARMs) and thereby aid the depressed housing market.
It all sounds logical, but there's one rub. It presupposes that inflation will quietly settle back into the Fed's comfort zone. Perhaps it will. But there's a possible contradiction embedded in Bernanke's game plan: the more successful the Fed is in reviving economic growth, the weaker the anti-inflationary pressures of a sluggish economy will be. The Fed might find itself in the awkward position of having flooded the economy with inflationary amounts of credit. There is at least some skepticism within the Fed itself. Richard Fisher, head of the Federal Reserve Bank of Dallas, dissented from the interest rate reduction. Now it's waiting time. Bernanke has doubled down on his bet. If he succeeds, his reputation should soar. If not, his bad gamble could cost the American economy for years.
© 2008
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