Friday, August 17, 2007

The Fed Crosses the Rubicon

The Federal Reserve Board, in a move that may ultimately make or break the reputation of Chairman Ben Bernanke, has cut its "discount window" rate by .5%. The rate cut is in response to widespread concern regarding the sub-prime mortgage market and its impact on Wall Street.

While the recent tumble of stocks certainly creates concerns, many had doubted that the Fed would reduce rates because other sectors of the economy remain strong. Unemployment is around 4.5%. Strong economic growth has driven concerns about the need for controlling inflation.

Was it right to drop the rate, or was this a panicked response to a market that dropped back to where it was only 6 months ago? Only time will tell. This move may halt the nation from a recession, or it may overheat the economy and result in high inflation. Based on which direction it goes, it will likely make Mr. Bernanke either a hero or a goat.

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