The Federal Reserve (US) chairman Ben Bernake has often resorted to monetary policy to combat recession or slowdown in the US Economy. The 75 basis point cut in interest rate is aimed at reviving the world’s largest economy and therefore to also make sure that the rest of the world’s economy stays on track. The equity investors in US have a blind faith in the ability of the Central Bank to bail out an economy in trouble. The cut in interest rate and therefore an increase in the money supply are aimed at reviving the credit market and the housing sector in the US. The assumption is that the individuals and companies will use the cheaper money to buy and invest. However, the US is still faced with a deflating asset bubble (mainly housing). The Banks are nursing billions of dollars worth of problem loans. The situation seems to be much worst than 2001 when the US economy reacted quickly to interest rate. The interest rate cuts do not augur well for the US economy if the existing examples are anything to go by. For example, the asset bubble of Japan in 1990 triggered off interest rate cuts by the Bank of Japan all the way down to zero but to no avail. Japan struggled with debt-deflation for more than a decade and there were no signs of economic growth. The 75 basis points reduction in the interest rates seems to be decision taken in panic; a panic that was caused by a market meltdown in US.
This entry was posted on Saturday, February 16th, 2008 (I migrated from blog.co.in)
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