Business | Economy
Bernanke gets cheers and jeers for rate cut move
Federal Reserve chairman Ben S. Bernanke's emergency interest-rate cut this week is either just what the doctor ordered or grounds for malpractice, depending on which prominent economists and investors you consult.
- Bloomberg
- Published: 22:56 January 25, 2008
Washington: Federal Reserve chairman Ben S. Bernanke's emergency interest-rate cut this week is either just what the doctor ordered or grounds for malpractice, depending on which prominent economists and investors you consult.
Stanford University Professor John Taylor says the move "made sense" and Harvard University's Martin Feldstein calls it a "very good thing". Morgan Stanley's Stephen Roach counters that the decision was "dangerous, reckless and irresponsible", and Nobel Prize winner Joseph Stiglitz says it resulted from "bad economic management".
Divergence
The divergence of views stems from the timing of the reduction, less than a day after stocks tumbled from Hong Kong to London, raising prospects of a slide in US markets. While Bernanke has warned of the danger that "fragile" markets pose to the slowing economy, some analysts say the risks rewarding investors who simply made bad decisions.
"By easing aggressively on the basis of no new information, they're sending a message that they have to protect and defend the markets," Roach, Morgan Stanley's Asia chairman, said this week at the World Economic Forum annual meeting in Davos.
The January 22 reduction in the benchmark federal-funds rate by three-quarters of a percentage point was the largest in the two decades that it has been the principal tool of policy makers.
"Doing it at this time, I think it made sense," Taylor, author of a landmark monetary-policy formula and the Treasury Department's top international official from 2001 to 2005, told Bloomberg Television. "The timing certainly was based on market performance, but the amounts are not far off the mark given the state of the economy."
While the Standard & Poor's 500 Index lost 1.1 per cent the day of the Fed's interest-rate cut, it has since rebounded more than three per cent in two days, ending a five-day losing streak. The index is still down 14 per cent since touching a record in October.
Traders anticipate a further half-point rate cut at the Fed's meeting on January 29-30. That would put the overnight interbank lending rate at three per cent and bring the cumulative reduction to 2.25 percentage points in less than five months, the deepest cut since 2001, when the US entered its last recession.
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