Monetary Policy, Borrowing Costs, and Credit Spreads

One of our AB readers had asked me why I had faith that the Federal Reserve’s latest move to easier monetary policy might help shore up aggregate demand given his observation that it has not reduced borrower costs. I attempted an answer to this question and it seems Paul Krugman has weighed in:

One simple measure of the seriousness of the credit problem is this: although the Federal Reserve has sharply cut the interest rate it controls over the past few weeks, the borrowing costs facing many companies and households have actually gone up.

The main theme of Paul’s latest is that there is a crisis of faith that is being seen in the form of rising credit spreads. While the easier monetary policy may be helping to offset this rise in credit spreads, Paul seems worried that this may not be enough to avoid a recession.