Cutting the US interest rates is still not the answer

Yesterday the US Federal Reserve cut its base rate from 4.5% to 4.25% and the markets slumped. They had expected a bigger cut. While the rate reductions may ease the pain of interest payments, they do not address the fundamental problem of overconsumption fuelled by credit (further analysis here and here). In fact the reductions might exacerbate the moral hazard, encouraging people to spend when they should pay down debt and save.

Unfortunately there is limited moral leadership in America today, except for the likes of Oprah, so the motivation to live within ones means, and those of the environment are limited.

Further easing is likely since this seems to be the main tool available to fix the economy. Unfortunately its not a fix and the problems of credit and exuberant lifestyles will take longer to adjust.


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