Wednesday, September 19, 2007

The Fed Finally Cuts....

So the US Federal Reserve Board have finally cut interest rates by 50 basis points (that's half a percent). Despite increasing evidence of a coming recession from many fronts- falling house prices, increasing housing foreclosures, decreasing demand for durable goods including cars, weak labour market data, and dropping wholesale inflation rates- the Fed held off on interest rate cuts due to concerns that inflation was uncomfortably high.

Now that they have cut, economists are divided, with some believing that the fed has not done enough, and others believing that they've done too much, and inflation will now increase.

For my part, I'm in the "not enough" camp. The melt-down of the housing sector is gaining momentum, and I expect to see increasing evidence of the fall in house prices feeding into lower consumption figures. As demand falls back further, I think the inflationary concerns will take care of themselves.

(For further insights on the Fed rate cut, check out Nouriel Roubini and James Hamilton).

No comments: