“Fed’s Up?” On War and Interest Rates
What is behind the Fed’s November 6 interest rate cut?
November 8, 2002
The Federal Reserve just cut interest rates by 50 basis points. Clearly, Fed officials are worried about the state of the U.S. economy.
However, a careful reading of what the Fed's key monetary policy committee did — and said makes us wonder. In fact, it suggests that some surprising questions are being asked at the Fed's meetings.
Nobody knows exactly what the FOMC members discussed at their most recent meeting. But the press release — normally quite bland — raises some intriguing issues.
The statement starts out with an optimistic take on the economy. And it then blames current problems on "greater uncertainty, in part attributable to heightened geopolitical risk."
One can surmise that the FOMC discuss the potential economic impact of an invasion of Iraq. You might also wonder about the "in part" comment.
What is the other part of the reason for greater uncertainty? Here, the oracles of U.S. monetary policy are silent.
Even stranger, the Fed took a drastic action — the 50 basis point cut is large by U.S. standards. Yet, at the same time, it stepped back from the brink.
Readers are assured in the press release that the Fed believes that "the risks are balanced." That's surprising since this is said essentially a moment after the FOMC members made it very clear that they are quite nervous about the economy.
In essence, each action undercuts the other. The 50 basis point move is the Fed's signal to markets that it will be accommodative (hurray!). Then, the "balanced" risks statement tries to make it clear that one need not worry too much.
That may be too clever, even by Mr. Greenspan's own Delphian standards. In essence, what this double take boils down to is this: From here on out, the U.S. economy is on its own. Fed or no Fed.
Perhaps this makes sense, since the Fed is rapidly using up its ability to intervene anyway. With a Fed funds rate of 1.25%, the Fed's ability to actually do anything could be exhausted in a few months of additional easing.
And then it would join the Bank of Japan in sitting on the sidelines as the economy stagnates.
Ultimately, the Fed should be judged by its actions — not words. And the Fed's actions indicate that — regardless of the pro-business nature of the election outcome — the U.S. economy is in trouble.
That in itself — war with Iraq or not — is a heightened geo-political risk for the entire world.
Chief Economist at The Globalist Research Center Daniel Bachman is the Former Chief Economist at The Globalist Research Center — as well as the Former Economics Editor at The Globalist. Mr. Bachman’s focus is on presenting innovative economic policy ideas to key global audiences — including policy professionals, journalists, corporate audiences and citizens at all […]