Federal Reserve Chairman Ben Bernanke reiterated today that the government will do whatever it takes to shore up the struggling economy. This includes pumping billions of dollars into a faltering housing market and cutting interest rates at an alarming pace to encourage borrowing. Sounds like a novel idea, right? Well, there are deeper problems that the federal government needs to take into account and, while it may hurt some, allowing the economy to correct may be better than holding off and making a larger correction later.
Lower interest rates always sound good to the consumer. It does encourage borrowing and, the more money people are spending, the greater the economic growth can be. The problem is that cutting rates also encourages inflation. Even with a slowing economy, the fed is projecting a higher inflationary rate than previously expected. In addition to lower interest rates, oil prices and food prices are leading the way to inflation. Continuing to slash interest rates will continue to push inflation higher.
It's really very, very complex and hard. Do you cut interest rates in hopes to grow the economy out of a possible recession or do you try to hold down inflation so buying power remains high? Obviously the fed is juggling both in hopes that the economy can recover. But it is going to be painful. Until the housing market recovers, it's going to be very difficult for everyone. I really have no idea what path we're getting ready to go down. I continue to have faith that this is a blip on the radar and the economy will be soaring again by 2009...but my hopes are slightly diminished compared to 6-months ago.
On a better note, check out Billy Preston. The drums behind him are amazing indeed...