August 27, 2008
Earlier this year, the Fed slashed interest rates to 2%, a figure that remained unchanged after a recent meeting. Analysts expect that the rate will not rise until some time next year.
While the Fed claims to have reduced rates to aid the floundering US housing sector, many economists believe that this will only further cripple the economy.
According to Richard Fisher, President of the Federal Reserve Bank of Dallas, the move will backfire by fueling inflation, which poses a greater threat to the economy than slowing economic growth and unstable markets.
Former IMF chief economist Kenneth Rogoff shares the same view: "Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States," he said. He added that the Fed was wrong to cut rates so "dramatically."
Comments | 5 Total
August 27, 2008 at 12:06pm by Brendan Collins
It sounds like the Fed has its hands full. I've said it before, the Fed's main job is to act as a cheerleader for the US economy - clearly, it thinks that keeping interest rates down will allow for greater development in the short term. Is high inflation worth the tradeoff, though? I suppose we'll have to wait and find out. My guess is probably not.
August 27, 2008 at 12:32pm by Larry Refsland
If inflation was a problem then I would agree. However, inflation is not out of control at the moment and low interest rates help fuel growth not suffocate it. We are in more trouble than I thought if people in Fisher's position have this mindset. He clearly does not understand the correlation between interest rates and inflation. The only people that benefit from higher rates are little old ladies that have all their money in CD's (Certificates of Deposits, not Compact Discs, Mr. Fisher).
August 27, 2008 at 1:21pm by D James Powers
Interest rates, the Economy and a good number of other factors in any nations economy are only reflective of the way a majority of it's people trend (I intended this word in lieu of 'tend') to believe it's government and reports of fiscal responsibility. We are, and the entire world is, a 'band-aid' society of ups & downs. We have an appreciation for only the Page 1 news of the current day. Question for anyone reading this -- What was the Headline of the Front Page of any section of any newspaper only 3-days ago? (Without looking back or archiving I'm willing to guess that less than 8% of replies will even have the subject correct.
Interesting is it not that Accounting and Accountability are the same but different? They're the same if the latter is taken seriously but let's fact it - we've Accountants to ensure that that will never happen. The long term prospect of any and all economies is that each will have peeks and valleys. It's the perseverence of the strongest that will determine how ill the effects will be and how long these ills will linger.
August 27, 2008 at 4:34pm by Bailey King
Given conventional market dynamics, the inflation rate will likely increase. However, if the feds hiked up the price for a "selective goods market", i.e., luxury goods and services, corporate sales..., perhaps the economy might profit from the lower interest rates.
September 1, 2008 at 7:48am by Steve McGee
If you want to understand how low interest rates affects inflation, go to the Mises Institute and look around.
If supply and demand mean anything, increasing the number of 'dollars' will reduce it's value. Want to know what happens to countries when their currency is debased? Try a search on Argentina or Zimbabwe + currency and see what comes up.
The Fed's main job is to *try* to minimize inflation and at the same time *try* to minimize unemployment. These are 'contradictory' according to the economic theory they're operating under.
For over 30 years, nothing has backed US currency other than the promise of future GDP. And (it's complicated) every dollar the Fed prints for the US earns interest that tax payers owe to the Fed. $1 from the Fed to US earns interest income for the Fed's owners (they are not completely known), it is not US Treasury as I used to think. SO -- our policies promote growth, in order to keep up with the growing debt taxpayers owe to the Fed.
*Do you know that the Fed is not a gov't bank, and that no elected federal government member oversees their decision-making? We don't even know how much money is in the market anymore - the Fed stopped disclosing that.