Former fed chairman Blinder and Goldman Sachs Chief Economist Bill Dudley on forthcoming rate cut. See Dudley particularly on how long term rates recent decline will be more helpful. Rising stock market is a big factor so how do we get markets rising. Falling markets here may be a self-fulfilling prophesy much like 1998 if fear of world wide collapse had not been aggressively fought by the fed. Therefore a possibility of a half point cut and some strong words by the fed on tuesday might be the medicine. Medicine has failed to work so far but another mega dose may have an effect. Will long term rates react in a big way to a half point cut? Just thinking outloud here.
"To the extent that there is a debate at the meeting it will be between 50 and 25 (basis points),'' said former Fed Vice
Chairman Alan Blinder.
But Blinder said an argument that could prevent the Fed from opting for the more forceful move is that there remain plenty of
reasons to expect economic improvement, even though early signs of it have yet to emerge.
Those include the six rate cuts the Fed did between January and June of this year, which should start to show their impact on
the economy with a lag of six to nine months, and the prospect of a boost to consumer spending from tax rebates the
government has begun mailing out.
But Blinder said the Fed has cause to be concerned that its rate cuts are not packing the punch that might have been expected
to help get the economy moving along again.
POWER OF RATE CUTS QUESTIONED
Bill Dudley, chief economist at Goldman Sachs, which developed a financial conditions index that gauges the potency of Fed
rate cuts, agreed with that concern.
``Monetary policy is helping the economy but much less powerfully than it has in the past,'' said Dudley, whose index takes into
account the stock market, long-term interest rates and the strength of the dollar.
The stock market is a key factor thwarting the effectiveness of the rate cuts, analysts said. Its recent declines could put a
damper on consumer and business spending.
In recent weeks, long-term bond yields and the value of the dollar have come down a little. But Dudley said the moves have not
been large enough to loosen up financial conditions in a way that would normally be associated with the kind of steep cuts in
short-term rates the Fed has carried out.
When long-term market interest rates fall, key rates for consumer loans such as mortgages decline as well, helping to stimulate
home-buying and other purchases. A cheaper dollar can help growth by making it easier for U.S. producers to sell their goods
abroad.
One issue unlikely to loom large at Tuesday's meeting is inflation. ``I think the Fed, and especially the chairman, have made it
clear that they're not worried about inflation now,'' Blinder said. |
