Hey, Ben, Enough With the Rate Cuts Already--They Aren't Working!

Next Wednesday, the Fed is expected to cut rates by another 25 bp, the latest in a frantic series of cuts that has brought Fed Funds down 3 points. We won’t know the extent to which this emergency injection has boosted the economy for months to come. What is clear, however, is what the Fed’s policy has done to the dollar, commodity prices, and inflation.

The problem with rate cuts is that they are a sawed-off shotgun, whereas the fixes we need are specific and complex. We have too much debt, and too much securitization of said debt, and the rate cuts don’t address those issues. The cuts make it easier for banks to recapitalize, but they don’t necessarily spur inter-bank lending. And they don’t translate into lower rates for home-owners. NY Post:

While the Fed has been diligently ratcheting down its funds rate – which is the amount banks charge each other to borrow money – those lower costs aren’t being passed on to borrowers. Mortgages are a good example. While the Fed has cut rates by 3 per cent – or 300 basis points, in Wall Street lingo – the average rate on a 30-year fixed-rate mortgage has fallen very modestly. These mortgages recently averaged 5.88 per cent compared with 6.17 per cent last year. That’s a drop of only 0.29 of one per cent, or 29 basis points. In other words, the Fed has cut the interest rate it controls 10 times as much as banks have cut what they charge would-be homeowners.

The rate cuts make the markets feel better, but they will ultimately do little to reignite the economy. Bernanke needs to take a stand now, before it’s too late. The side-effects of his “cure” are worst than the disease.

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