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A Disasterous Rate Cut ?

Posted By Barry Ritholtz On September 15, 2008 @ 12:00 pm In Bailouts,Federal Reserve,Fixed Income/Interest Rates,Inflation | Comments Disabled

Why on earth the FOMC would want to undue any of the work by Treasury with a rate cut?That is the current market bet, that a 25 or even 50 basis cut may occur at tomorrow’s Fed meeting [1].

That would be ill advised.

We have survived the initial impact caused by the collapse of Lehman Brothers (LEH). AIG is certainly in trouble,  as are Wachovia (WB) and Washington Mutual (WM) and others.

The Fed would be well served, with rates now at 2%, to keep some powder try for the latter innings of this crisis.

Unless we are looking to emulate Japan’s 15 year recession, a ZIRP [2]/pushing on a string policy would not be advantageous.


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URLs in this post:

[1] Fed meeting: http://www.marketwatch.com/news/story/fed-sets-emergency-steps-ease/story.aspx?guid={71DBEE1F-DDD0-494C-A476-434842EF0753}

[2] ZIRP: http://en.wikipedia.org/wiki/Zero_interest_rate_policy

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