Reading the Fed
With its 50-point rate cut, "the Fed is saying that sometimes you gotta do what you gotta do," says Caroline Baum in Bloomberg. Inflation and other "consequences be damned." Inflation is usually a central bank's "numero uno concern," but the Fed also has to foster growth and act as lender of last resort. And if inflation turns out to have been a bigger risk, well "if you're going to screw up, make sure you screw up big." Bailout accusations aside, stabilizing financial markets is a "legitimate role" for the Fed when the larger economy is at risk. After all, "no central banker wants to have 'recession' on his resume."
The Fed went "further than most Wall Street analysts expected yesterday" because of the looming "real estate bust," says David Leonhardt in The New York Times. The housing slump "has become the dominant force in the economy" now, and it "still has a long way to go." Homes on average are overvalued by about 20 percent, and to reset to the normal 3-to-1 price-to-income ratio, housing prices could drop by 10 percent and hold for a few years. That "would be the worst housing downturn on record," and it would hurt employment, consumer spending, and growth. No wonder the Fed "is now on a recession watch."
