WASHINGTON (MarketWatch) – The Federal Reserve on Wednesday slashed overnight interest rates by a half-point to 1.0%, and signaled that downside risks to growth remain, indicating even more rate cuts could come.
In its statement, the Federal Open Market Committee said the pace of growth has slowed "markedly" and the extraordinary financial market stress could put the economy at greater risk.
The Fed said that inflation was no longer a threat and that the central bank will cut rates as needed to boost the economy.
No real surprise here, but I will make a comment or two. The Fed, representing status quo interests, is desperately trying to recreate the exponential expansion of credit and debt that marked the last 2 decades (but really picked up steam from 2000 onwards).
Of course, one way to do this is to punish savers – you know, people who might choose to put money aside rather than spend it immediately on stuff.
This is the first thing that setting such a low rate does. It assures that anybody with money in a CD will pretty much be guaranteed to lose money. Better to spend it.
Second, the ultra-low rate rewards big banks who make their living by borrowing at a low rate (from the Fed and savers) and lending at a higher rate. So the rate cut is just a way to throw a bit more loot into the banking system at the expense of workers.
Remember, it was Alan Greenspan’s 1% "blowout special" in 2003-2004 that led to this entire mess. Left completely unsaid in the article above (and all others) is how trying the same tactic again is going to deliver a different or better result.
Instead, we might just have to admit to ourselves that we are not going to be returning to the credit free-for-all that dominated the past few years. Which means that more than a few organization and financial institutions that built their operations around the perpetual expansion of credit may have to fold up shop or skinny down their operations. This includes government at all levels.
I think this rate cut is a mistake and that it signals weakness rather than strength. The Fed is rapidly shedding its patina of credibility.