Fed Rate Cut: No Guts, No Glory

The Fed may still be concerned about inflation given that the UK said consumer prices there had a core increase of 4.7%. Even with that news, the oil and commodities elements of rising costs have been undermined by the perception that the world’s economy is slowing and demand for goods and services is declining.

Most indications are that the Fed will not change rates, at least for now. It will reserve the right to cut them in an emergency.

By almost any definition, the emergency is here and is getting worse by the day.

The stock market collapse is only a relatively modest part of the problem. Unemployment clearly is rising. Layoffs at financial firms will exacerbate that. Hewlett-Packard (HPQ) said it would let 25,000 people go. Even healthy firms will cut where they can to keep earnings moving up as their revenues come under pressure.

The typical American has no equity left in his home. A flailing equities market has recently cut into many retirement savings accounts. This will undermine consumer spending again.

In China, the central government is beginning what will probably be a series of interest rate cuts. The corrosive by-product of inflation is being trumped by the need to keep the economy from falling.

The Fed has a simpler puzzle in front of it. The sharp reversal in consumer confidence and the torrential sell-off of stocks should kneecap any rise in prices between now and the end of the year.

There is still no credit in the market. Banks will not lend to one another. This means that lending to consumers is out of the question.

The Fed’s first obligation should be to do no harm. Cutting rates may not improve the current state of affairs, but not cutting rates could burden consumers with additional worry. If consumers are too afraid to buy anything but the absolute necessities, the economy will suffer further.

At the very least, the Fed should do its part.

Douglas A. McIntyre