US Federal Reserve announced early this morning that the federal funds rate will be cut to 2% from 2.25%. It is fed’s seventh cuts in a row since the credit crunch unfolded last summer. So far the aggregate rate cuts accumulate to 3.25 percentage points.
Fed may suspend rate cutting
Compared with the previous cuts early this year, Fed’s move this time was far less desperate. The previous rate slashes were deemed as hasty contingent efforts. The 0.25 percentage point cut came exactly as the market had expected.
However, the moderation of Fed in rate cut does not pull people out of judgement that the Fed was terrified by the current economic downturn, and its consecutive rate cuts showed lack of other macro tools which can alleviate the pessimist sentiment hovering in the market. Rate cut is the only weapon left in Fed’s arsenal.
Repeat of vicious cycle
People doubt that what Fed can do the next if the recession in the States continues to deteriorate. After the massive tax rebate and seven rate cuts, there is almost no room for further economic stimulus that the Fed can utilize to spur the economy. The latest figures substantiated the already well-accepted claim that US is now in recession and the overall situation is going to worsen.
Moreover, Bernanke and Fed are actually repeating what Allen Greenspan had done in the aftermath of 911, slashing interest rate in order to boost lending and borrowing in the financial system. However, we should not forget that it is Greenspan’s over-reacted rate cuts led the financial sector into credit frenzy. The ensued credit frenzy and excessive capital volatility spawned sub-prime-led credit crisis that we see now.
Is Fed bringing an end to the economic woe or it is generating something more horrible for the next cycle?
