Rates! They are a'fallin!
Ben Bernanke at the FOMC met and cut rates yesterday by another 50bp. Let me just say that, in the past, I've been a big proponent of Bernanke. He is a well respected technocrat and I think he's very intelligent. The current actions of the FOMC are a bit troubling to me... We haven't gone over a cliff yet... but I'd like to see us advance a little more slowly towards the precipice then we seem to be.
Rates have dropped 1.25% in three weeks. That level of drop is unprecedented in modern U.S. Economics. BUT... and this is a big but... we're probably okay as long as the Fed decides, "Okay, we've cut alot... let's wait a bit and see what happens"... The problem that the Fed got into before was that they expected rate cuts to work a little quicker and when they didn't, they worried that they weren't working at all. At a fed funds rate of 3% (prime of 6%) we're now at the bottom edge of what most economists would consider the "neutral, non-inflationary" interest rate (generally regarded to be 3-5%)... The fed is essentially leaning on the accelerator of the economy ever so slightly. Let's now make the mistake we did before and put the petal to the metal, however. There's a tendency by FOMC directors, to think of the rate changes (rather than the rate itself) as the accelerator... "If we want to accelerate the economy we should cut rates"... That's not entirely accurate... The first question needs to be, "What's the rate at now?" and if the answer is "Low", the next question should be, "Do we want to accelerate the economy more than we are right now?"
I think the economy doesn't need any acceleration... If we're headed into a recession it's not going to be a typical one. Banks need to purge their bad loans and cure themselves of this moral hazard they've created (i.e. "The Fed will bail us out"). Current markets seem to be pricing in another quarter point rate cut by mid year. That's about the pace I would expect. The fed has now races us considerably lower then we were and its time to pause and catch our breaths.
There's another reason to be wary and slow down. We've now flipped the financial market economy on its head. There's going to be an inevitable reallocation of resources as a result of these cuts. As a result, we need to pause and let those resource allocations begin to happen... The move from 6.25% to 3.00% is going to cause a lot more reallocation of resources then the subsequent more from 3.00% to 2.00% will... Let's keep that in mind. If anyone speaks to Ben Bernanke on a regular basis, point him to my blog... Clearly, I'm the expert he wishes he was ;)
2 Comments:
Truly, you have a dizzying intellect.
Can an economy be artificially stimulated indefinitely? Always seems like the slightest fluctuation in anything is cause for alarm and emergency procedures as if we were about to be kicked into the Pit of Death. Is there such a thing as an economy self-correcting anymore? Or is it that in the world of instantaneous results we expect (hell, demand) things be fixed instantly?
And on a side note, why is it everyone still goes bat-shit crazy when the Dow drops 300 points in a day? Dropping 300 when the index is at 12000 or 13000 is hardly the same as when the index was at 2500.
The Fed's role (in theory) is to make sure that the cycles aren't quite as bad. In theory, that means making the good times not quite as good and the bad times not quite as bad... In this case, I think the Fed needs to let the market work it's way out of these troubles and (unfortunately) that may mean letting some people get foreclosed on.
The best role government can take at this point would be to mandate a 1-2 year moratorium on apartment's looking negatively at foreclosures during the application process.
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