Bernanke Rips Off The Band-Aid

Bernanke wasted little effort today in cutting the funds rate and the discount rate 50 basis points. The statement said:

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Big deal? Not so much. Remember, the effective Fed Funds Rate has been below 5% for some time now and this action simply brings the stated rate in line with what is happening out there in the market. Stocks surged on the news, but what else is new. The odd thing here is we are at a state where bad news is good. If the economy were not slowing down, no need for a sharp rate cut. Since it is (that is not real good), we are cutting rates. Odd.

Too be honest, this concerns me. It implies that things are weaker out there than we believe - either that or Bernanke isn't playing games and the threat of weakness is just going to be stamped out. I hope the later is the case. It would mean that Bernanke accomplished what he wanted with the credit issue and now sees the possibility of this turning. Rather than pull off the band-aid slowly to see what happens down the road, he is just jumping ahead to be in front of any weakness and head it off.

Bernanke indicated as much in the statement when he said, "forestall some of the adverse effects on the broader economy that might otherwise arise". This tells me he is heading off what "might" happen now that inflation has moderated and somewhat under control.

I like this guy, no games or teaser cuts. Just action.

Comments

[willm:]

Since the Fed March meeting where inflation was stated as a concern, oil, gold and the cpi have increased. Wouldnt these increases indicate that the threat of inflation has actually increased since March?

2007 Sep 18 04:56 PM

[willm:]

Since the Fed March meeting where inflation was stated as a concern, oil, gold and the cpi have increased. Wouldnt these increases indicate that the threat of inflation has actually increased since March?

2007 Sep 18 04:57 PM

[Todd Sullivan:]

willm,

CPI has dropped two consecutive months and is way below the 3.8 reading in august last year. Also it has remained steady this summer.

2007 Sep 19 04:09 PM