Bernanke's rate cut
November 03, 2007
– Comments (3)
I have to admit it: the pessimists who saw it coming were right and I was dead wrong. I expected the 4.75% barrier to hold because of the fact that GDP is growing, house values are holding on (a mere 4.2% dip after a 100% rise is but a tiny correction after a monstrous rally), and inflation is on the rise. Apparently, Bernanke was even more anxious to deliver instant gratification to homeowners that I gave him credit for.
This rate cut against the backdrop of a robust economy is really bad news. Until now, rate cuts usually followed recessions. But now the policy is to cut rates to prevent a recession. What we're essentially saying is this: our economy is still strong, but it's only because we're cutting rates. Note that it's not even enough to keep the rates low (4.75% is very low by historical standards). No, if we just keep them low, we'll go into recession, or so we think. The necessary condition of our economic prosperity is that our low rates must be getting ever lower. When was the last time we had high rates? Oh, it was very long time ago, sometime in the last century. Since then we always had low rates, something like 2%-4%. We like our low rates, and we can't raise them anymore. We've tried once, and our economy nearly gave up the ghost when we briefly touched 5.25%. Will never do it again. Remember I said some time ago that we may never see the 5.25% rate again? Well, the way things go, I'm wondering if it's the time to say goodbye to 5% if not to 4.75%. With so many homeowners demanding annual property appreciation, that barrier cannot be defended. It's true, of course, that a barrel of oil will now cost even more pounds of dollar bills, but that's another story.
RSS Headlines
Fool UK