Oct 31 2007
Fed Drops Rates by Quarter Point
No surprise here in the Fed’s action. We talked about it here two weeks ago. Was it the right move? The economy isn’t doing badly. Recent numbers show a slight up-tick: GDP is growing at 3.9% for example. Some pundits opine that the move is a concession to Wall Street megafirms rocked by the subprime meltdown.
My take is simple: the Fed is going to have to seriously start thinking about what inflation is doing to the economy. The New York Times has a good chart that shows the linkage between rates and inflation. We may get a slight downturn during the third quarter, and the rate cuts will look smart. The problem comes in 2008, when the economy will likely shake the subprime problem, jolt back into productivity and resume a trajectory of stable growth. That’s when the weakness of our dollar is going to really start hurting.
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