Friday, 21 March 2008

Cut, cut, cut...cut, cut, cut...

The US Federal Reserve (or "The Fed" if you're a too-cool politico or city type), cut interest rates again in attempt to stave off recession in the US. Will it work? In short, no. The Fed's reactionary approach of late (I'm not sure Alan Greenspan would be responding in the same fashion), shows a real failure to understand the most basic aspects of human psychology. Apart from the fact that banks worldwide are less willing to lend to each other and to us normals, the real issue is that public confidence in these institutions has taken a massive hit.

You might be thinking, "But isn't the Fed trying to restore confidence in the economy?". Yes, that's exactly what the Fed thinks it's doing. In fact, by making such dramatic rate cuts (about 3% in the last 6 months) the Fed is merely underlining the fact that there are lean times ahead. It's like shouting from the rooftops that we're in big trouble and hoping that it will resolve everything. Unfortunately for the Fed, and probably the rest of us, that shouting is going to fall on deaf ears.

I imagine the rate cut will offer some short term bump in economic performance, but it will take a lot longer for public perceptions to shift and for confidence to grow.

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