Only a week before the Federal Reserve’s next regularly scheduled meeting on Septemer 18th and there’s a great debate taking place. Bloomberg reports of division within the Fed over how much to cut the Fed Funds Rate, while other Fed members hint that lowering the rate may not be the best idea. Of course it promotes a lot of discussion by the major media, with most debating how big the interest rate cut could be. The bond market is looking for a more aggressive fed funds rate cut as well. And we may even get a surprise as some think another discount rate cut is in the works. But is an interest rate cut really the right answer, and does it matter? It may not be the panacea for all things, but I humbly offer a resounding “Yes!” Although a rate cut may make little difference over the short-term regarding housing, mortgage and credit issues or the commercial paper market, it will make some difference. More importantly, those issues coupled with a possible employment slowdown are directly affecting the economy at this point. What’s that spell? R-E-C-E-S-S-I-O-N.
All together, if the Fed doesn’t cut interest rates, the risk of recession increases greatly. That’s why I believe they will cut rates, yet Robert Reich thinks the rate cut will have little impact on preventing a recession, with tax cuts a better response to stimulate the economy. Good point (don’t want to begrudge a tax cut for anyone), but I still think the Fed will drop the funds rate as one small step to help avert a looming recession. Besides… it’s not just the U.S. anymore. We are all part of the giant economic matrix throughout the world. With apologies to Neil Armstrong, maybe it’s one small step for the U.S. economy, one giant leap for the global economy. If the economy is at risk they’ve got to do something. Seems to me that’s their job. How much of a rate cut? Until leveling off, the rate increases over the past few years have taken place consistently, in small measured increments. Seems like Fed President Ben Bernanke is a “measured response” kind of guy. If it’s 50 basis points, then they are obviously very concerned about a possible recession and the other factors affecting the U.S. economy. Interesting week ahead… with, as they say, all eyes on the Fed.
Here’s a ten-year comparison of the Fed Funds Rate and 30-year Conventional (fixed) mortgage rate.
A look at the Dow over the past decade as well. Some interesting comparisons, but neither the Fed nor the markets like recessions.
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