Federal Reserve Lowers Interest Rate to 4.75%
Saturday September 22, 2007
Federal Reserve Chairman Ben Bernanke pondering his next move Photo:Chip Somodevilla /Getty Images
What do you think about the Fed cutting the interest rate to 4.75%, the first since 2003 and how will this move affect consumers and businesses? Thanks.Quite frankly, I was a little surprised that the Fed lowered the rate by .5%. This was a dramatic move meant to forestall further economic decline by restoring confidence in the financial markets.
I believe this move will help consumers and businesses in the short term by adding liquidity to the economy, thereby making capital easier to get. In the long term, it may have an adverse effect by increasing inflation or by putting downward pressure on the dollar.
To understand my reasoning, read A Primer on Current Federal Reserve Interest Rates.
Comments
It is with some trepidation that I note other central banks are flooding their economies with more currency also.
While this will serve to ‘prop up’ the sinking dollar (by diminishing the ‘incentive’ to dump dollars) it will also serve as a springboard for inflation…which could easily become ‘hyper-inflation’ or ‘Stag-flation’ of the variety that plagued us in the mid 80’s with painfully high interest rates.
The real problem here is wages have failed to keep pace with rapidly inflating asset prices.
When rapidly rising commodity prices leave consumers ‘in the dust’, what passes for our economy will fall apart.
Since interest rate cuts do no good for those who are not deemed ‘creditworthy’, this move is more so a bailout for investors than a ‘lifeline’ for beleagured consumers.
Which is to say the foreclosures and defaults will continue…at an accelerating pace!
You are so right about the real problem being that wages haven’t kept pace…which is probably one reason why debt in the one of the world’s richest countries is so high. People don’t want to feel poorer than their parents, or than they did 20 years ago.
I think the next few months will be very interesting as the forces of inflation, the declining dollar, higher commodity prices, and falling real estate will all put conflicting pressures on the economy.
Kimberly
Um, the coming financial storm will teach folks the difference between ‘feeling’ poor and ‘being’ poor.
As the economy contracts (due to overstretched consumers cutting back) it will start a ‘cascade effect’ that feeds on itself.
What troubles me is the ‘timing’…there are going to be a lot of people in a lot trouble during the hardest season of the year, the upcoming ‘heating season’.
Civil order is a very fragile thing…and desperate people will dare much if their loved ones are endangered.
The whipsaw of rising prices and diminished purchasing power threatens to rend the very fabric of society asunder.
Evicting millions from their homes in the dead of winter is a cruel fate indeed…or will it be crueler to let them stay without food or heat?
That aside, what will become of those living on fixed incomes? How will they weather the hyper-inflation of commodity prices?
Is a government ‘rescue’ feasable..or even possible? Living on borrowed money created this mess…’borrowing more’ certainly isn’t the answer to it.
The coming situation will re-define the term ‘a rock and a hard place’.