To: plusone
"...No, with the fed funds overnight rate at 1.25%, further cuts won't stimulate the economy....."
plusone:
Lowering the target rate for federal funds in today's economy doesn't amount to much more than window dressing. Injecting high powered money into the banking system by way of outright purchase of term Treasury notes (a so-called coupon pass) is another matter entirely. It is in the baldest sense the Fed creating credit. It merely credits its own account and uses the funds to purchase assets held by commercial banks.
The effect of a coupon pass is to immediately increase the amount that banks can lend by a multiple of the actual credit creation.
End result: virtually immediate increase of economic activity, if the conditions are supportive of same. It's not a panacea, but if timed properly can be a real booster shot to the economy that a showy funds rate decrease could never match.
Downside: potentially inflationary. Once you've let the credit horse out of the barn, its hard to get it back in. The liquidity has to slosh somewhere, and it it doesn't inspire enough real investment and production you get inflation.
For the record, I think the timing is right. And, I'll bet St. Lawrence Kudlow and most of the Supply Side fraternity agree with me.
To: irish_links
Having the Fed purchase Tbills directly won't help the banking system or the economy if people are unwilling to borrow, even at very low rates. Without new loans, the multiplier effect won't kick in, and no new credit money will be created.
19 posted on
04/07/2003 7:46:02 PM PDT by
plusone
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