Fed Rate Action

In this post a little over a week ago, I cited the errors which I think Bernanke's Fed has recently made, including,

"To date, it's unclear that any of the extra Fed-supplied liquidity has affected the credit markets in a substantial, lasting manner. Instead, equity markets have reacted to the various rate cuts like heroin addict to his latest fix. After the effect wears off, he looks for the next dose, hoping it will be even larger.

The editorial points out that the Fed is notoriously bad at what used to be called "fine tuning." In this case, knowing when to suddenly switch from recession-fighting rate cuts to inflation-fighting rate hikes seems likely to be problematic."

Now we learn that the Fed will certainly cut interest rates at least 50bp tomorrow, with market expectations having reached a full percentage point, or 100bp.

What the heck is going on here?

The Fed's rate cuts going back to this summer haven't exactly lifted either the economy or financial markets out of whatever difficulties they are experiencing. So what will an additional one percentage point cut accomplish?

Brian Wesbury opined, in a discussion on CNBC this afternoon about Bear Stearns, that, ironically, the Fed's rate cuts had helped to drive the firm out of business. Wesbury noted that rates were falling on various risky assets, as the Fed lowered rates, while risks remained high. As returns no longer matched or compensated for risks, instrument prices tanked.

The result, for 'mark to market' securities, which composed much of Bear's book, was a rapid contraction of value.

The Fed's recent actions regarding accepting various types of paper at its windows for discounting, including now allowing non-commercial banks access to these facilities, seems appropriate to me in this market.

But further stoking of inflation through needless rate cuts seems to me to be a major mistake.