Tuesday, April 15, 2008

Be careful what you wish for

NABE president Martin Feldstein opines in todays WSJ "Enough With the Interest Rate Cuts" that it is time for the Federal Reserve to stop cutting interest rates. Back in January he was still a strong advocate for more aggressive Fed action (see video for more info).

The rise in the U.S. inflation rate, and the adverse effects in emerging market countries, might be defensible if lower interest rates could significantly stimulate demand and reduce the risk of a deep recession. But under current conditions, reducing the federal funds interest rate from the current 2.25% by 50 or 75 basis points is not likely to do much to stimulate demand.

The current conditions in the housing industry and in credit markets mean that a further lowering of interest rates will have a smaller impact on demand than in previous recessions. In previous recessions, lower rates stimulated aggregate demand by inducing increased home building. But with the massive inventory of unsold homes – up 50% from a few years ago – a further cut in the fed funds rate would have little effect on housing construction.

Moreover, lowering the fed funds rate has not brought down mortgage interest rates. While the fed funds rate is down three percentage points from this time last year, mortgage interest rates are down by less than 0.5 percentage points.

click for video

source: Enough With the Interest Rate Cuts

source: Recession Risks & Remedies

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