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January 22, 2008

Fed Acts Quickly To Stall The Bear

After watching a tsunami of sell-offs in the overseas markets, Fed chair Ben Bernanke acted rapidly this morning to quell a big downturn on Wall Street. The Fed lowered the interest rate by 0.75, taking the rate from 4.25% to 3.5%, hoping that will convince investors to stay in the market:

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.

Welcome to the activist Fed. Analysts expected action last week, and when that did not occur, expected nothing to happen until the next Fed meeting in two weeks. Bernanke took a page from the bipartisan interest in DC in the apparent recession, as the Fed's action comes as a piece with the stimulus package making its way through Congress.

Some may argue, though, that the Fed will make matters worse. This crisis started with a credit meltdown that came from poor loan decisions made when credit was cheap. Rather than lowering the price of credit as the Fed dramatically did here, analysts have argued that tightening credit and liquidity would be the better long-term strategy to resolve the actual problem, rather than addressing the symptoms.

That kind of strategy would force the country -- and the globe -- to suffer a recession as a corrective. That might be an effective economic strategy, but not a political strategy. In an election year, no one in either party wants to explain why they think a recession would be good for the soul. That is why we see short-term strategies like one-time tax rebates and credit-price drops.

Hopefully, that strategy works as intended. However, we could be seeing a repeated cycle of cheap-credit damage that we are inadvertently reinforcing.

UPDATE: Michelle Malkin has more thoughts on government using our money to stimulate the economy. Why not just let us keep it in the first place, and cut out the middlemen?


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