Posted by Sada Mosler on January 22nd, 2008
The Fed is aware rate cuts don’t do much for near term financial disruptions. For example, the FF/LIBOR spread was first addressed with FF cuts, but little or nothing changed until the TAF was introduced to address and normalize that spread.
Along the same lines, Bernanke has recently met with the President and Congress to coordinate a fiscal package, and today’s cuts were preceded by Paulson talking about what Treasury is doing for the financial crisis.
The Fed knows they pay an inflation price for each cut, but also believe they need to get the current financial crisis behind them first, and then address any residual inflation issue. Nor does Congress want to go into the election with a weak economy.
The incentives are in place for a credible fiscal package.
And with core inflation indicators now moving up, the Fed would very much like this rate cut, along with the pending fiscal package, to ‘work’ and be the last one needed.