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Fed Rate Cut: Feed the world or save the housing market

Posted April 29, 2008

“Interest rate policy normally only affects the world economy at the margin, but it has now been so expansionary for so long that the Fed’s interest-rate strategy has turned into a moral dilemma of sorts. In short, the central bank’s monetary policy will likely determine whether millions of U.S. homeowners lose their homes or millions of the world’s poor starve.” — Martin Hutchinson

by Martin Hutchinson

Baltimore — (TFN): The Fed’s dilemma: Rescue the housing market or feed the poor?

At their two-day meeting that starts today (Tuesday), U.S. Federal Reserve policymakers will have to grapple with a moral choice that is well beyond the pay grade of central bankers - choosing between the financial stability of U.S. homeowners and world hunger.

That’s not an exaggeration. Interest rate policy normally only affects the world economy at the margin, but it has now been so expansionary for so long that the Fed’s interest-rate strategy has turned into a moral dilemma of sorts. In short, the central bank’s monetary policy will likely determine whether millions of U.S. homeowners lose their homes or millions of the world’s poor starve.

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Fed Rate Cut: Expansionist policies lead to market bubbles

The Federal Reserve has been pursuing an expansionary monetary policy - growing the M3 money supply much faster than Gross Domestic Product (GDP) - since 1995. This has yet to result in U.S. consumer price inflation because a very powerful deflationary force - the introduction of cheap and readily available global communications through the Internet - has counteracted it.

Even though prices of domestically produced goods were increasing, the prices of many goods and services dropped as they becamgre sourced from India (software services, for instance) and China (clothing, for example). Read on to learn why the Fed could cause mass starvation or destroy the U.S. real estate market.

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Posted by Martin Hutchinson · Filed Under US Stocks and Markets 

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