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October 31, 2007
Should the Fed cut rates?
Turns out Fed Chairman Ben Bernanke’s “first big test” last month was “only a midterm,” says Steven Pearlstein in The Washington Post. The “final exam” comes today, when the Fed decides whether to stand up to “the insatiable demands of Wall Street” by foregoing another interest rate cut. The 50-basis-point cut in September “had the desired effect” by easing liquidity in the credit market. But “there is no compelling economic case” for another cut. Wall Street has to take its medicine, and if the Fed cuts rates, it will merely show it’s “so desperate to avoid a credit crunch that it is willing to reinflate the bubbles and keep the party going any way it can.”
If it doesn’t cut rates, “investors will wonder what the Fed knows that they don’t and question its commitment to transparency,” says Herbert Lash in Reuters. Yes, some economists fret that a rate cut would “fan inflation worries” or “unfairly bail out investors.” But if policy-makers keep rates steady, the market will think they are keeping key economic data close to the vest.
“Everyone knows” already that the Fed will cut rates by a quarter point, says Randall Forsyth in Barron’s Online. And that’s a good thing. The U.S. economy, and the consumers that prop it up, are not in good economic health, “rosy” GDP data notwithstanding. Homeowners are awash in debt, and lower interest rates will help save those “on the cusp of being able to pay” their mortgage. The “bust following the bursting of the housing bubble” is probably going to lead to “sharply lower” short-term rates, as the Fed moves to hurry the recovery from a coming recession. And “moving slowly only delays the adjustment.”
of The Week magazine.