Thursday, January 31, 2008

Fed Rate Cut Baffles the Beeb

Here is more pure stupidity by BBC editors.

Fed cuts US interest rates to 3%
The Federal Reserve has cut interest rates for the second time in nine days as it tries to keep the US economy from entering a recession.

The central bank lowered rates to 3% from 3.5% after a two-day meeting.

Last week, the Fed slashed the cost of borrowing by the largest amount in 25 years in a shock move to calm tumbling global stock markets.

The Fed is hoping the cuts will cushion the US economy from the worst effects of the credit crunch and housing slump.
There is no "hoping" to it, this will improve things in the market.

For those unfamiliar with how this impacts the economy (such as socialist BBC editors, apparently), not only does this lower borrowing costs, but it serves to expand the money supply due to increased lending activity. This will impact the economy much faster and deeper than any tax rebate. Fiscal policy moves like tax rebates have much longer time lags before they take effect.

Of course the BBc editors had to document their stupidity yet again by printing this criticism of the Fed:
The Fed looks foolish. It seems they're afraid of the market," said David Greenwald, a partner at Scalene Capital Management.

"Everyone knows that it takes a while for 75 basis points to get through the economy and by cutting 50 now, I just think they're not leaving much room in the future.
And everyone who knows what they are talking about knows that monetary policy takes effect much faster than fiscal policy. What would Mr. Greenwald and the BBC editors have the Fed do otherwise right now? Waive a magic wand? Wish upon a star?

Monetary policy moves have shorter time lags than fiscal policy moves. So once again, the BBC editors are either outright stupid or they are lying to you with this piece.

The reason why the Fed's did the 75-point basis cut last week was to forestall a market meltdown that was happening around the world on January 21 while the U.S. markets were closed due to a holiday. Their choice was either make the move or watch panic set in. The rest of the world was certainly not going to do anything to deal with the slide. Then the Feds recalculated and did the rest of the needed cut this week.

I look for the market to trade sideways for the next six months or so, and then start moving forward again. I also look for the BBC editors to continually document their stupidity in print with articles like this.

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