Bernanke wasted little effort today in cutting the funds rate & the discount rate 50 basis points. The statement said:
“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.
Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”
Big deal? Not so much. Remember the effective Fed Funds Rate has been below 5% for some time now and this action simply brings the stated rate in line with what is happening out there in the market. Stocks surged on the news but what else is new. The odd thing here is we are at a state where bad news is good. If the economy was not slowing down, no need for a rate cut. Since it is (that is not real good), we are cutting rates. Odd..
Too be honest, this concerns me. To me, it implies that things are weaker out there than we believe, either that or Bernanke isn’t playing games and the threat of weakness is just going to be stamped out. I hope the later is the case. It would mean that Bernanke accomplished what he wanted with the credit issue and now sees the possibility of this turning. Rather than pull off the band-aid slowly to see what happens down the road, he is just jumping ahead to be in front of any weakness and head it off.
Bernanke indicated as much in the statement when he said, “forestall some of the adverse effects on the broader economy that might otherwise arise”. This tells me he is heading off what “might” happen now that inflation has moderated and somewhat under control.
I like this guy, no games or teaser cuts. Just action.
One reply on “Bernanke Rips Off The Band-aid”
Bernanke has a big job ahead of him.
We cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess.