US interest rates eased again, of course …

The Fed lowered the federal funds rate by 0.25% to 4.5%, as the markets expected and desired.  The vote was not quite unanimous with one governor voting to hold.  The discount rate was also reduced by 0.25% to 5%.

The reduction in the fed funds rate was almost required given the anxiety of the market leading up to the decision.  If there had not been a reduction, the chance of an emotional rout was high.  As we’ve said before, reducing the rate is not going to resolve the credit crunch, but has contributed to moral hazard.  While equities will continue to come under pressure, it would be sensible for the Fed to communicate that it is unlikely to reduce the rate further for the time being.  A resolution of financial imbalances, driven by sub-prime and leveraged investment (PE), must be allowed to occur without handholding by the Fed.  It is not the Fed’s job to intervene and it may regret the recent reductions in 2008 when rate reductions might be appropriate.  It will be interesting to see what kind of public statements Bernanke and company make going in to November …

Even blondes prefer euros to dollars
How low can you go, U S Dollar?

Leave a Reply