Aug 17 2007
The Fed edges toward lower interest rates
To have a sustained rally in markets we need lower interest rates, and a clearer statement about the impact of losses on the main banks.
The Fed tried offering cash to the market but that on its own did not work. Now they are cutting the rate they lend to the banks, but not the main Fed funds rate. That helps a bit more.
This financial crisis has been created??by the Central Banks. They kept rates too low for too long, allowing a big build up of dodgy debt. They then made big increases in rates from a low level which has started to destabilise the whole debt structure.
They now have to decide when they think they have done enough to??slim the debt bubble, without doing so much that they bring the rest of the economy down too.
Clearly the Fed are edging towards lower rates, the only medicine that does - after a lag - always work.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
It would not be wise to have interest rates falling below nominal GDP growth. By the same token recent attempts by the Fed and ECB to inject liquidity are not wise. Much better if market forces are allowed to react naturally, bail out should not be an option.
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Interest rates are low - they are as low as the Japanese and Chinese want them to be.
What we do need is more control over the monetary-base which seems to be inflating at a rapid rate in Britain with PFI and LBO deals. So long as hedge-funds are making supernormal rent interest rates are simply too low, or rather monetary expansion is rampantly too high
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