Should the Fed still be lowering Interest Rates?12-16-2008 |
It looks highly likely that the Federal Reserve will be lowering the Fed Funds target rate by 50 Basis Points (i.e. 0.50%) to 50 Basis Points (i.e. 0.50%) from its current level of 1% this week. The move is expected in response to continuing fallout from the global credit crunch and mounting concerns over the prospects for economic growth in 2009. The 50 Basis Points reduction would bring the Fed Funds Rate to the lowest level on record according to the Federal Reserve Bank of New York’s website dating back to 1971.
I would argue that the move will not result in any positive short-term consequences and is unnecessary. The credit markets are not frozen because of the cost of credit but rather because of the lack of credit due to a heightened level of risk aversion and confidence on the part of the vast majority of lenders. Lowering the Fed Funds rate further will not solve either of these issues and will likely devalue the U.S. Dollar further and, more importantly, take away one of the final arrows that the Fed has in its quiver to stave off further economic woes – which are likely to continue in 2009.