Fed does what was expected of it

by Frank James

Virtually no one expects that the Federal Reserve's half-a-percentage-point of the rate banks charge each other for overnight loans to one percent will do much of anything.

Still, since the financial markets were expecting the cut, and the economy is so afflicted, the Fed had to act, so it did. Otherwise, it would have sent the completely wrong signal. It was a "just don't stand there, do something" moment.

Of course, the Fed has done a lot already, including helping to engineer Wall Street rescues and pumping dollars into the economy at a furious rate for the better part of a year. Surely no one could accuse the Fed of not doing enough.

Nonetheless, I heard a Harvard economist, Kenneth Rogoff, on the public radio program "Marketplace" say the Fed may very well take the rate down to zero before it's all over.

Actually, if you take into account inflation, the real rate is already less than zero, as economist Bernard Baumohl points out.

Prior to today's move, the real fed funds rate was already a highly stimulative negative 4%. That it has now slightly increased to a negative 4.5% is not a reason to uncork the Champaign bottle. The latest Fed move is not going to hasten the economic recovery by a single day or accelerate the cleansing of bank balance sheets. What is needed more than anything else at this stage is simply patience.