New Fed Reserve Cut : Will It Work This Time ?
Yesterday The Federal Reserve cut the main U.S. interest rate to as low as zero for the first time ever in an attempt to boost credit and try to end the financial crisis, causing the bond market to collapse and the stock markets to soar.
While this may be a blessing for those consumers looking to buy a house or a car, and hence a boost to the deflationary and slumping US economy, analysts are divided as to the long-term effect of this drastic move will have on consumer spending and the economy overall.
This post looks into some of the prevailing arguments surrounding the historic Fed cut.
MarketWatch quotes an economic team at Wells Fargo for being very optimistic about the cut:
This latest change in monetary policy strategy by the Fed has the potential to be highly effective in our view, and will better reduce the cost of borrowing for a vast majority of consumers and businesses,”
The same article also quotes Stephen Gallagher, Chief Economist of SocGen:
Bank confidence in its ability to finance itself today and in the future is an essential for making loans,”
Bloomberg quotes The Federal Open Market Committee for saying that:
“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.
The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
According to Wlliam Poole, former president of the St. Louis Fed:
The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,”
Associated Press quotes an impressed Mark Zandi who feels that The Fed is ahead of the game this time:
The Fed has taken some very historic steps and for the first time since this crisis began, they have gotten ahead of expectations instead of trailing behind them,” said Mark Zandi, chief economist at Moody’s Economy.com.
The article, however, suggests that the crisis is not over and may go on for some time due to the depth of same:
Economists cautioned that even with the Fed’s bold moves it will take months for the economy to stabilize given that it is confronting the worst financial crisis since the Great Depression and a year-long recession that is already the longest in a quarter century.
The news on the economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.
And AP’s article concludes that at least when it comes to the US Government’s inflationary fears things are on the up:
The weak economy is helping to keep a lid on prices. The government reported Tuesday that consumer prices fell by a record 1.7 percent in November as gasoline and other energy prices continued to plunge. The Fed noted that “inflation pressures have diminished appreciably,” a development that gives the central bank maneuvering room to focus on boosting growth.
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