The economic stimulus package coming from Congress and the Administration may not be in effect until well into the second quarter. There is already news that the Senate and House are having trouble finding common ground on some issues.
If the economy is falling in the direction of a deep recession, that leaves the Fed as the only Dutch-boy at the dike. The agency may cut rates by .5% to help the economy, but, with Congress slow on the draw, it ought to take rates down another .75%. As Bloomberg points out, this could lead to the Fed’s interest rate being below the rate of inflation. As one analyst pointed out to the news service "the Fed’s mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long.” The observation is intelligent and well-spoken.
On the other hand, as Reuters reported recently, a big cut could get the housing market moving again. Although slow home sales and mortgage defaults are not the only problems with the US economy, they are at the heart of a drop in consumer spending and huge write-offs at Wall St. firms. A better housing market might actually lift the value of some subprime mortgage derivative instruments sitting on bank and investment firm balance sheets.
The economy will not wait to move into a slump because Congress is moving slowly. If the slump has not started, it is at the tipping point.
The Fed is all the economy has now.
Douglas A. McIntyre
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