The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
Reactions to the latest from the FED have been very mixed. Brad DeLong brings us the reporting from Rex Nutting adding that “Ben Bernanke Is Earning His Pay”. Willem Buiter does not appear to be happy with this move calling the move “excessive and smells of fear”. Felix Salmon echoes the concerns of Buiter:
There’s nothing in there to justify a huge rate cut in the week before a regularly-scheduled meeting. Tighter credit for some households? Come on. There’s one reason and one reason only that the Fed took this move, and it’s the plunge in global stock markets on Monday, along with indications that the US markets were set to follow suit. Now the Fed is charged with keeping employment high and inflation low; it’s not charged with protecting the capital of investors in the stock market. So this action smells a bit like panic to me, and it might also have prevented the kind of stomach-lurching selling which could conceivably have marked a market bottom. I have to say I don’t like it.
James Hamilton offers a view that differs substantially from that of Buiter and Salmon:
I doubt very much that anyone on the FOMC has much interest in protecting the investments of stock market participants. Instead, I suspect that the Fed is using equity prices just as I and many other economic analysts do, namely, as a useful aggregator of private and public information about near-term prospects for economic growth. All the recent indicators have suggested a significant deterioration of real economic activity over the last two months. I take the global stock market sell-off as one more confirmation of that assessment, and new information about the global scope of the problems we face.
While the views from the professionals may differ, there is no doubt that The Sandwichman was being too kind when he called Ben Stein a doofus. My Econospeak colleague is upset that Ben Stein said recessions are not all bad with this quote taking the cake:
Those who tend to their work, who get to the office or showroom or shop early, stay late, work hard, stay on the phones dialing for deals (as my pal, Barron Thomas, puts it), will make money. Those who stay sharp and make a point of befriending their clients will make money. Yes, some extra effort will be needed, but it’ll pay off. There’s still money to be made, even when the economy itself has slowed down. It’s the guy or gal who puts in extra effort who stays ahead and even prospers when the economy is in a slowdown. The easygoing, laid-back time-servers get tossed overboard.
So Mr. Stein thinks that the only reason why the average workweek is pro-cyclical is that most folks become lazy bastards during a recession. But the title of this post had to do with this quote:
This slowdown is happening faster and harder than I thought it would. I was too optimistic. My optimism was based on a belief that the Federal Reserve would act more aggressively than it has in fighting the slowdown. It didn’t, and we’re paying the price.
Stein wants us to believe that he (as an “economist”) that he knew that the FED needed to act sooner and faster. But of course, Mr. Stein (who only plays an economist on TV or whatever) was calling for FED moderation and didn’t bother to criticize Ben Bernanke for not cutting interest rates sooner until well after the FED had already reduced interest rates a bit. There will be a lot of smart reactions if not disagreements among the professionals about today’s move, but I think we’ve already endured the dumbest reaction. Let’s just hope no one tops Ben Stein on this one!