Federal Reserve Chairman Ben Bernanke said Thursday the central bank was ready to cut interest rates further if fresh signs of a weaker-than-expected U.S. economy emerge.
The Federal Open Market Committee, which sets Fed monetary policy, "will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Bernanke told the Senate Banking Committee in prepared testimony.
The Fed has done a lot to stave off a recession but stands ready to do more if the outlook darkens, he said.
(Sung to the Tune of Ghostbusters) When interest rates are negative after adjusting for inflation, who do you call? Bernanke!
I realize that 1.) Bernanke's in a really bad place, 2.) No one wants to do nothing when the world is falling apart, 3.) Saying "lowering interest rates won't help" isn't an answer anyone wants to hear, and 4.) saying, "The financial intermediary system really screwed up and now they need to pay the price" isn't an answer anybody wants to hear either.
But the signs are very clear that interest rate cuts aren't helping. The credit markets are still frozen. And the problems are spreading. The student loan market is now tightening. Junk Bond Yields are spiking. The CDO market is experiencing more problems. The monoline insurers are a breath away from a credit downgrade. Low interest rates won't help when the issue is counter-party risk and saving your own financial ass.
So maybe the Fed should start thinking about their other mandate -- price stability. If they can keep prices stable through all of this mess we might be better off in the long run.
7 comments:
Bernanke can take only so much bitch-slapping. In other words, rates can't go negative. (Can they?)
Will the economy recover before The Fed runs out of bullets in this war? Or is Bernanke merely delaying the inevitable economic catastrophe? If so, for what? The Obama Administration?
"Or is Bernanke merely delaying the inevitable economic catastrophe? If so, for what? The Obama Administration?"
I think that is spot on. The economic stimulus package, rate cuts are all designed to delay the collapse for whoever is lucky enough to inherit the problem.
jimdotz sez,
"Or is Bernanke merely delaying the inevitable economic catastrophe? If so, for what? The Obama Administration?"
Bingo! Actually, not just Obama as any D will do.
This is theft, pure and simple.
Keep kicking that can down the road, just like Iraq.
per jimdotz: "Bernanke can take only so much bitch-slapping. In other words, rates can't go negative. (Can they?)"
FREE MONEY FOR EVERYONE!!! WOO HOO!!! Sign me UP!
The only free money is for the banks. Interest rates on mortgages and credit card debt are even higher after the interest rate cuts.
Interesting discussion over at Brad Delong's on the overall lack of impact of the fed's moves on the availability of credit. This comment in particular got my attention:
...Bernanke is limited in the extent to which he can drop interest rates by the fact that Treasury needs to sell a kabillion dollars worth of bonds every month; bonds that are rather less appealing at lower rates.
I've seen various mutterings (but nothing on this site) that already there is pushback from bond buyers who are simply walking away from the offerings. We likewise saw a local version of this what, yesterday or the day before with NY munis.
So how about an analysis of the collision of these two effects. Everything I've seen posits that Bernanke can do what he likes with interest rates, which simply doesn't seem to match reality.
Thoughts?
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