Fed Myths : The silliness that always accompanies Fed meeting never ceases to amaze, so let's get right to the task of dispelling the myths. Myth 1: The Fed is running out of ammunition. This myth is propagated by pessimists who want you to believe that the Fed can't do much more for the economy now that the funds rate is down to 2.50%. But by our tally, that leaves 250 bp more of rate cuts in the arsenal, which can make a significant difference to business borrowers and households with mortgages. Beyond that, the Fed can just pump reserves into the system even with rates at zero (the Bank of Japan is doing that now). We probably won't get to that point, but it's important to understand that the Fed still has plenty of ammunition. Myth 2: the Fed needs to stop cutting rates because it risks undermining confidence and hurts those who depend on deposit rates. This is probably the silliest of the myths. There are still those who believe that the Fed can make everything better by pretending everything is better. Psychology has a role in any economy, but the idea that the economy is nothing but a con game is false. If the economy is hurting, the Fed does not help matters by leaving rates high and telling us that everything is rosy (they kept rates high in the early 1930s, and that didn't work so well). Also, though depositors can be hurt by lower rates, we know for a fact that lower rates, on the whole, stimulate growth. Myth 3: The 50 bp rate cut must mean that the economy is worse than we feared. OK, maybe this is the silliest of the bunch. Let's make one point clear: the Fed knows just as much about the economy right now as the rest of us, which is not much. After the Sep 11 attacks, the economic outlook is more clouded than ever and only the passage of time will clarify the outlook. The idea that the Fed has more information that confirms a bleaker outlook presumes that such information exists. Even if the Fed already knew Friday's employment report (which it doesn't), that would hardly matter. Who really believes that a report detailing the economy in the week of Sep 14 tells us anything about the future? The Fed cut rates aggressively today because the country just suffered an unprecedented attack at a time of economic vulnerability - to quibble about 25 bp in this environment would have been irresponsible. So here are the real takeaways today: 1) the Fed cut 50 bp because it was the right thing to do, 2) the Fed, like the rest of us, doesn't know what is coming next, 3) Fed rate cuts are most definitely good for the economy, and 4) the Fed has plenty of ammunition left to lift the economy should it become necessary.
- Greg Jones, Briefing.com |
