Bernanke: Just Say No To Lowering The Interest Rate

I’m sorry for the lack of original posts, but I have a final tomorrow. My priority is to get ready for the exam. Next weekend I’ll go ahead and write original posts like usual. I was reading an article in BusinessWeek on the Fed’s decision with the interest rate. It’s the same as before, 5.25%.

Here’s the quote that I found interesting in this article:

Nodding just slightly to concerns about a credit crunch, the committee said “credit conditions have become tighter for some households and businesses, and the housing correction is ongoing.” But it went on to say: “Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.” The committee even said it continues to regard inflation as a bigger risk than an economic slowdown.

Some people may think that in the wake of the increase in foreclosures this tactic is insane. The other side of the coin is :

Bernanke’s approach recognizes that the Fed can’t be all things to all people. If the Fed lowered rates to rescue subprime borrowers and their lenders, it would raise the risk of excessive borrowing and speculation in other sectors, possibly causing higher inflation and a stock bubble. Bernanke’s approach is being supported by many of his fellow academic economists.

Well, what do you guys think? Did the Fed make the right call? Please leave a comment.

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Update: Wise Bread has an excellent article going into more detail about the Fed’s purpose. Phillip Brewer gives his opinion on why there’s no need for a panic. Please go over and check it out.

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