Gan
03-14-2008, 04:19 PM
NEW YORK (CNNMoney.com) -- The two widely accepted facts about the upcoming Federal Reserve meeting Tuesday is that the central bank is worried about the country falling into a recession and that it will again slash interest rates sharply.
But should the Fed stop worrying and love a recession?
Several economists, including one member of the Fed's policy-making committee, have argued that more rate cuts are the wrong solution to spur economic growth. Some even believe a recession might be the best answer for the economy in the long term. That's still a minority view though.
Federal funds futures on the Chicago Board of Trade show investors betting that there is a 100% chance of at least another half-point cut at the March 18 meeting, and an 88% chance of a three-quarter point cut.
Even most critics of the Fed's rate cuts concede some additional cuts are certain Tuesday, especially since a report Friday morning showed that consumer prices held steady last month.
If the Fed cuts as much as the market expects, that would put its key federal funds rate at 2.25%, down from 5.25% when the Fed first began lowering rates six months ago.
Yet, it's not clear that the Fed cuts can do much to fix what ails the U.S. economy as it undergoes a credit crunch.
Too late for rate cuts to work?
There is a growing view among leading economists that the country is likely already in a recession that the Fed's previous rate cuts couldn't stop.
"The problems the markets are facing are not due to interest rates being too high. It's a lack of confidence," said Barry Ritholtz, the CEO and director of equity research for Fusion IQ.
Ritholtz and others arguing against more cuts say that only an economic slowdown can limit the inflationary pressures now building. They say that rate cuts are causing a sharp decline in the dollar that is feeding record prices for commodities such as oil and gold.
"The bottom line is that additional rate cuts are not going to help lenders trust each other and lend more," said Rich Yamarone, director of economic research at Argus Research. "They are just going to throw accelerant on a heated inflationary environment."
And perhaps more controversially, those calling for an end to rate cuts say that the business failures and other economic pain likely to accompany a recession are a necessary evil for the economy going forward.
Using low rates to try to ward off a recession is only likely to feed another asset bubble like the one in tech stocks in the 1990's or housing in the middle of this decade.
"What is this obsessive need to overturn the business cycle?" said Ritholtz. "You can end up preventing the market from following its normal course of clearing out the deadwood and letting healthy trees grow. The creative destruction of capitalism, that's what the Fed is working to prevent."
more...
http://money.cnn.com/2008/03/14/news/economy/fed_outlook/index.htm?section=money_topstories
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Interesting counterpoint to the consideration of just how much action by the Federal Reserve is necessary for the economy right now.
Conventional thought now seems to be that we are indeed in a recession even though we have not qualified by the textbook definition (2 months negative GDP growth).
As the author if this article posits, perhaps the effecacy of another rate slash would appear to have diminishing returns, as even some on the FOMC are voicing; however, whats not known is whether or not the fire is completely out. It seems to be a fine line between preventing flareups with more water (rate cuts) versus extending or prolonging the damage by flooding (over reacting).
Its well established that the business cycle naturally occurs in our economy and as with all the phases involved, the recessionary period is naturally occuring, just like the other three (trough, expansion, peak). Where the Fed comes into play is to try and mitigate the period of recession as well as smooth out the slope (sharpness/amplitude) of the the other phases/periods in the overall cycle.
Thus far the business cycle has responded semi-predictable to the efforts of the Fed; however, the business cycle recently has taken on a new aspect with the evolution of our economy from a national to a global outlay.
Should we allow some of the pain of recession clean out the bad from the good/stable in our market place (seperating the wheat from the chaff, etc.)?
At what point will the Law of Unintended Consequences become a major factor in the Fed's efforts to flatten out the business cycle in both recessionary/trough periods as well as expansion/peak periods?
Personally I think slashing the rates again is ok as long as its no more than a half a point. Then efforts need to go into shoring up the value of the dollar and bolstering the confidence in the existing lending institutions so that they free up the availability of loans using smarter and more prudent means of assessing and assigning risk.
Then we must be patient and see how the economy responds. This will be especially difficult in an election year and with the pressures that accompany politicians as they seek relection. A key question there is what will be proposed and enacted upon by fiscal policy makers on the hill and will it be appropriate or successful.
Whatever happens, it will be interesting times for Bernanke & Co. And for us as well.
But should the Fed stop worrying and love a recession?
Several economists, including one member of the Fed's policy-making committee, have argued that more rate cuts are the wrong solution to spur economic growth. Some even believe a recession might be the best answer for the economy in the long term. That's still a minority view though.
Federal funds futures on the Chicago Board of Trade show investors betting that there is a 100% chance of at least another half-point cut at the March 18 meeting, and an 88% chance of a three-quarter point cut.
Even most critics of the Fed's rate cuts concede some additional cuts are certain Tuesday, especially since a report Friday morning showed that consumer prices held steady last month.
If the Fed cuts as much as the market expects, that would put its key federal funds rate at 2.25%, down from 5.25% when the Fed first began lowering rates six months ago.
Yet, it's not clear that the Fed cuts can do much to fix what ails the U.S. economy as it undergoes a credit crunch.
Too late for rate cuts to work?
There is a growing view among leading economists that the country is likely already in a recession that the Fed's previous rate cuts couldn't stop.
"The problems the markets are facing are not due to interest rates being too high. It's a lack of confidence," said Barry Ritholtz, the CEO and director of equity research for Fusion IQ.
Ritholtz and others arguing against more cuts say that only an economic slowdown can limit the inflationary pressures now building. They say that rate cuts are causing a sharp decline in the dollar that is feeding record prices for commodities such as oil and gold.
"The bottom line is that additional rate cuts are not going to help lenders trust each other and lend more," said Rich Yamarone, director of economic research at Argus Research. "They are just going to throw accelerant on a heated inflationary environment."
And perhaps more controversially, those calling for an end to rate cuts say that the business failures and other economic pain likely to accompany a recession are a necessary evil for the economy going forward.
Using low rates to try to ward off a recession is only likely to feed another asset bubble like the one in tech stocks in the 1990's or housing in the middle of this decade.
"What is this obsessive need to overturn the business cycle?" said Ritholtz. "You can end up preventing the market from following its normal course of clearing out the deadwood and letting healthy trees grow. The creative destruction of capitalism, that's what the Fed is working to prevent."
more...
http://money.cnn.com/2008/03/14/news/economy/fed_outlook/index.htm?section=money_topstories
____________________________________
Interesting counterpoint to the consideration of just how much action by the Federal Reserve is necessary for the economy right now.
Conventional thought now seems to be that we are indeed in a recession even though we have not qualified by the textbook definition (2 months negative GDP growth).
As the author if this article posits, perhaps the effecacy of another rate slash would appear to have diminishing returns, as even some on the FOMC are voicing; however, whats not known is whether or not the fire is completely out. It seems to be a fine line between preventing flareups with more water (rate cuts) versus extending or prolonging the damage by flooding (over reacting).
Its well established that the business cycle naturally occurs in our economy and as with all the phases involved, the recessionary period is naturally occuring, just like the other three (trough, expansion, peak). Where the Fed comes into play is to try and mitigate the period of recession as well as smooth out the slope (sharpness/amplitude) of the the other phases/periods in the overall cycle.
Thus far the business cycle has responded semi-predictable to the efforts of the Fed; however, the business cycle recently has taken on a new aspect with the evolution of our economy from a national to a global outlay.
Should we allow some of the pain of recession clean out the bad from the good/stable in our market place (seperating the wheat from the chaff, etc.)?
At what point will the Law of Unintended Consequences become a major factor in the Fed's efforts to flatten out the business cycle in both recessionary/trough periods as well as expansion/peak periods?
Personally I think slashing the rates again is ok as long as its no more than a half a point. Then efforts need to go into shoring up the value of the dollar and bolstering the confidence in the existing lending institutions so that they free up the availability of loans using smarter and more prudent means of assessing and assigning risk.
Then we must be patient and see how the economy responds. This will be especially difficult in an election year and with the pressures that accompany politicians as they seek relection. A key question there is what will be proposed and enacted upon by fiscal policy makers on the hill and will it be appropriate or successful.
Whatever happens, it will be interesting times for Bernanke & Co. And for us as well.