Evening in America
As I write, the New York Stock Exchange has been open for about ten minutes, and the Dow Industrials have risen nearly 200 points. Traders must be pricing in one whopper of a cut in the discount rate come 2:15 this afternoon. The futures markets are betting on a full percentage point:
Traders predict the Federal Open Market Committee, meeting
today in Washington, will lower the overnight lending rate by a
full percentage point or more, based on futures prices in
Chicago. That would be the biggest reduction since 1984, when
Paul Volcker led the central bank, and would bring the benchmark
rate down to 2 percent.
And there the similarities end. Volcker's cut (from 11.75 percent to 10!) came toward the end of a rate-raising cycle he put in place to put the squeeze on inflation. It came at the cost of the brutal "double-dip" recession of 1981-82, the worst in the postwar era. But it worked, and by 1984 the U.S. economy had been restored to some semblance of health, at least by post-1971 fiat currency standards. It was "Morning in America."
Ben Bernanke's cut today is the continuation of a panicky rate-cutting cycle he put in place to keep the economy going, inflation be damned. It's come too late to stop a recession. Whether it will be worse than 1981-82 remains to be seen. Whether this "rescue effort" will succeed remains to be seen. If it does, it will be at the cost of ever-worsening price inflation that won't be matched by wage inflation. Then at some point, Bernanke and Co. will have to start raising rates again, and the whole ugly boom-bust cycle will begin anew — probably for the last time. It is "Evening in America."
But the evening is still young.
"The Fed will be extremely hesitant to disappoint the
markets,'' said Stephen Stanley, chief economist at RBS
Greenwich Capital Markets Inc. and a former member of the
Richmond Fed staff, who predicts a full percentage-point cut.
The market's been open 20 minutes now. The 200-point increase in the Dow is holding. Party on.