Hail Yellen.
Yes, it is.
I haven’t seen anyone else say it yet, so I will. The Fed’s policy move today might not have happened — probably would not have happened — if not for the heroic blogging efforts of Scott Sumner. Numerous other bloggers, including the market monetarists and some Keynesians and neo Keynesians have been important too, plus Michael Woodford and some others, but Scott is really the guy who got the ball rolling and persuaded us all that there is something here and wouldn’t let us forget about it. [It’s not just monetary policy, it’s Scott Sumner day. Tyler Cowen. Marginal Revolution. September 13 2012]
The Fed, in a surprise announcement in Washington, lowered the so-called discount rate by 0.5 percentage point, to 5.75 percent. Policy makers dropped language indicating their bias toward fighting inflation, and instead highlighted a rising threat to economic growth. [Fed Cuts Discount Rate to 5.75% to Ease Credit Crunch (Update4). Bloomberg. August 17 2007]
Economic slowdown has taken over inflation as the greater concern!
I cannot wait to see what will happen to the federal fund rate in about a month time! By the way the market is reacting, the FFR might stay unchanged though.
It is worth noting that the T-bills yield curve is slight inverted in the short run and pretty much flat in the long run.
p/s — amid the cut, dissent emerges. The reason for dissent against rate cut revolves around the economic concept of moral hazard.
The subprime crisis is really created by borrowers lending to those that do not have the credit rating to borrow money. With the Fed coming out to bail a risky market, it only encourages risky activities to continue because lenders know that the Fed provides them with a safety net. This is why bail out is usually frowned upon.
Normatively, I am against rate cut but a rate cut is what I am expecting as far as the subprime mortgage episode is concerned.
This issue surrounding moral hazard might prevent the FFR from declining next month. So, the roller coaster ride might not end just yet.
Though reports have speculated that the Fed will leave the rate at 5.25%, recent jitters might convince the Fed to slightly trim the rate.
The FOMC sits today. So, brace yourself.
For me personally, the last few weeks have been miserable. What was a 20% returns portfolio now gives only nearly 1%. Sigh…
p/s — the rate stays:
US interest rates have been kept on hold, despite mounting fears about the state of the economy.
Analysts had widely predicted the US Federal Reserve would leave rates at 5.25% for a 13th month, and that was the unanimous verdict of the Fed panel. [US interest rates left unchanged. BBC News. August 7 2007]