Was A Good Decision The rate cut by the Fed?

Editor's Note: There were 75 basis point cut by the Fed, not the 100 that the market expected. Leave the door open to further reductions. It is headed for Greenspan nominal rates, which generated the housing market boom. But today, the actual rate is lower. Care. I can send your comments to: paola@moneyweekes.com

Was it a good decision on rate cuts by the Fed?

Buenos Aires, Argentina

March 19, 2008

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It was what the market expected and turned back to the Fed interest rate cut. This time he did it by 75 basis points, leaving it at 2.25%, the lowest since February 2005. According to the Fed, the decision to cut rates seeks to "promote growth ... and mitigate risks to economic activity?, Given that" upside risks to slower growth? ... With this show and watching the action perspective Fed since the crisis hit, there's not much you can berate Bernanke on their actions to address it.

It is also very likely to see new critics who attacked the poor Ben about the possible negative consequences that may result from monetary policy has been carrying out the Federal Reserve. While this policy rate cut is very risky, I understand that Bernanke was the only way to send clear signals to markets about the stance of the Fed's fight to prevent the slowdown in the U.S. economy to advance to such gravity to be recognized as a recession.

Beyond dangerous this game is proposing the Fed with its interest rate policy, it is not proven to have the desired effect. That is why this latest venture of the Federal Reserve raises questions and poses the following question: Was it a good decision given the rate cut by the Fed?

According to Nouriel Roubini (prior to this decision by the Fed): "The recession in the U.S. is inevitable that cuts will be deeper and say that the recession may have begun in December and continue until 2009. What makes the Fed will now difference for change. It's too late?.

If I stick only to the ineffectiveness that is taking the policy rate cut, in generating a greater willingness of the financial system to generate credit for the private sector (it is true that monetary policy acts with a lag of several months, but the picture shows that the outlook in the credit sector will remain negative for a long time), I agree with Roubini and would have to say that the Fed was wrong and wasted firepower to this cut.

But I would not risk all to say that the Fed decision was ineffective without looking how this will impact on market expectations. I understand that now more than ever, control and safety expectations of it can attest to Bear Stearns, which may not end well deserved. This rate cut may act like a painkiller for a very nervous market with this action claiming not to explode. It will not be able to know and we will have the right give the Federal Reserve.

Something we do know is that with this cut, the Fed rates are approaching the minimum levels that exist in the Greenspan years (since we are at 125 basis points and at this rate will not be long in coming) and, for many, has been one of the main causes of the current crisis.

In fact, what happened in the Greenspan years, was not only that interest rates had reached extremely low levels, but these levels were maintained for an extended period, which enabled this exuberance in the markets. That interest rates remain at these levels for a long time appears to be in the mind of Bernanke.

If one pays attention to real interest rates, realizes that the current level of rates is even less than the minimum levels of the "Greenspan era?. This is a question no less to be followed carefully.

And to make matters worse, the problems seem to be worsening inflation. That is at least suggesting the latest data on U.S. wholesale prices, since although increased by 0.3% (lower than the value expected by the market), the core component increased by 0.5% (more than twice that expected by the market).

Bernanke is aware of the risks you are taking at the moment and that is why as soon as the economy shows signs of reaction, immediately initiate the reverse path of policy rates. That is at least what has been implied in statements from the Fed and the response required to the current crisis to shake and contingency fees, the reversal of this policy promises to maintain this momentum.

As a descendant of this dynamic in the U.S. rates is not accompanied (only a few exceptions) by the world's major central banks is that they are increasing the pressure on the dollar to continue weakening. That is why the euro has already forgotten the $ 1.50 and started to flirt with a new roof located at U.S. $ 1.60, while European entrepreneurs are becoming increasingly nervous and concerned about this situation . But this condition is not unique to the economy of the euro area, since the same occurs, for example, in Japan and Latin America.

This weakness of the dollar adds more pressure on international commodity prices, pressure is likely to be countered with increasingly evident slowdown in the U.S. economy and its negative effects on its main trading partners.

With all these elements on the table, I turn to ask: Will the Fed done well? ... I think we have to wait a little to know whether the positive effects that can generate this new cut surpass those negative enough to turn the mood of the market.

We will meet again tomorrow,

Horacio Pozzo