Friday, January 25, 2008

Can The Almighty Fed Really Save Us?

Rich people on Wall Street sure do like to complain about the Federal Reserve. How it doesn’t do enough, and it isn’t fast enough to save them from themselves. Maybe the Fed isn’t all-knowing, all-seeing, and all-powerful. From a Fortune article entitled The darker side of interest rate cuts:

Compelling as it may be, a rate-cutting policy may not always have the desired salutary effect; after all, Japan effectively had interest rates of near-zero percent for years without emerging from its economic gloom. And it carries its own costs. Lower rates boost the economy by making big purchases such as houses more affordable. They can also help banks rebuild their balance sheets, by enabling them to borrow at lower rates and lend at higher ones. But lower rates also tend to reduce the value of the dollar, which has already fallen sharply in recent years amid a surge in U.S. consumption funded by overseas borrowing. Further declines in the dollar raise the risk of boosting inflation, which hurts consumers by reducing their purchasing power.

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