August 11, 2002

No Interest Rate Cut Next Week

The Federal Reserve--or at least a strong faction within it--uses the Wall Street Journal's Greg Ip to send a message that there will be no interest rate cut next week.

I'm still not sure why: the only explanation that would make sense is if the Fed now believes it overreacted to the situation and cut interest rates more than it should have last fall, and I don't see the evidence for that.


WSJ.com - Economy

...The Federal Reserve is concerned about the economy's recovery, but not as worried as Wall Street. So while the central bank isn't likely to cut rates next week, it still has to figure out how to acknowledge the risks without sounding either panicked or complacent....

Posted by DeLong at August 11, 2002 03:19 AM | TrackBack

Comments

Given the strength in productivity growth and the very mild inflation numbers, a cut in rates to spur growth that might begin to open up new jobs would seem helpful.

Posted by: on August 11, 2002 08:12 AM

Brad,

The federal reserve governors are assuming there will be no negative wealth effect from the stock market decline. There was no negative wealth effect from the combined stock market decline and inflation of the 70's. Probably the stock market decline did less middle class damage than the current decline. Perhaps the decline in personal savings after 1975 was a middle class attempt to maintain comfortable styles of life in a high inflation economy. What then of now? Savings can not fall too much from here. We are an aging population. The market decline has lasted 28 months and must present some problems for middle class women and men older than say 50. Can home price increases cancel any negative wealth effects? Hopefully the federal reserve governors are not being too cautious.

Posted by: JD on August 11, 2002 09:35 AM

I imagine the fed is very scared of shooting its wad too soon. The Dow at 8000 was still overpriced, we don't know when or how the housing bubble will pop, we don't know what's going to happen in Brazil, we don't know what's going to happen with Iraq, we don't know when/if foreigners are going to lose faith in buying American treasury's. All in all, with only 1.75% worth of ammunition available, do you really want to fire off .25% of that now, before any of these possible disasters have hit?

Posted by: Maynard Handley on August 11, 2002 08:14 PM

I imagine the fed is very scared of shooting its wad too soon. The Dow at 8000 was still overpriced, we don't know when or how the housing bubble will pop, we don't know what's going to happen in Brazil, we don't know what's going to happen with Iraq, we don't know when/if foreigners are going to lose faith in buying American treasury's. All in all, with only 1.75% worth of ammunition available, do you really want to fire off .25% of that now, before any of these possible disasters have hit?

Posted by: Maynard Handley on August 12, 2002 02:23 AM
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