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To: Jerome who wrote (52366)	5/5/2001 10:50:46 PM
From: Jacob Snyder	Read Replies (1) \| Respond to of 77399

Well, first, Fed rate cuts have a negligible effect for 6 months. The maximum effect is about 18-24 months later. It takes that long for rate cuts to change decision-making in the real economy. Increases in liquidity have an emmediate effect. So, unemployment could keep going up all through 2001, and this doesn't mean the rate cuts are ineffective. As long as they don't push inflation over 4%, the Fed can safely continue aggressively cutting rates, all the way down to zero (as the Japanese have done). If rates are at zero, and 2 years later the economy is still not responding, then the Fed is out of ammo. Then you have to try massive government deficits, or something else (like a war or revolution or moving toward a planned economy, which is what frequently happens when countries get to that point). Hitler ended the Depression in his own country by deficits and central planning. Then, he ended the Depression in the whole world by starting WWII. The main problem the Fed faces is not that interest rate cuts will be ineffective. Unlike the Japanese, if you give money to an American, he (or she) can be counted on to spend it. See how Americans are still buying cars and houses, in spite of record household debt and rising unemployment. Rather, the danger is that the Fed may be too effective, causing a rapid oscillation, an overshoot in the other direction. This is a constant danger in any rapid, large Fed action, given the very long lag time. The Fed could lower rates to 3%, and thereby avoid a recession in 2001. But, by doing that, they run a big danger of facing out-of-control inflation in 2002. Whether this happens largely depends on whether productivity gains seen in the 1990s are cyclical or technology-driven. Greenspan is guessing and hoping it is the latter. If the Fed responds to inflation in 2002 with rapid interest rate increases, they are like someone driving a car by alternately stomping on the accelerator and the brakes. Hard on the passengers (me and you).