The Fed Should Coordinate a Rate Cut

The Fed's target Fed funds rate reached 2 percent on April 30, which, given the higher inflation rate this year, is lower in real terms than the 1 percent target rate in 2003. The aggressive Fed easing of the Fed funds and discount rates no doubt helped, compared to not doing it, but it didn't help as much as expected.  It's innovative use of special auction facilities seemed to be a better, more targeted, alternative. 

For those reasons, and the fact that the lower you go the sooner you will have to start back up, my recent position has been that no further cuts in the Fed funds and discount rates are needed. If more Fed stimulus is called for, it can be provided through one of the special facilities.

However, given the recent worsening in the credit freeze and its spread to Europe, I have changed my mind. The European Central Bank has been in denial, in my opinion, even given its single inflation mandate. ECB easing is overdue and a coordinated rate cut with the Fed, the Bank of England, the Bank of Canada and perhaps others participating would likely have a major impact, albeit primarily psychological.

If the Fed initiates a coordinated rate cut of 50 basis points, it will give the ECB cover to do what it should have done already.  It would also give the Fed's cut more bang for the buck. After all, given the way things are going in the markets, what do we have to lose?

Comments (15)

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  1. A. Sakowski says:

    Robert – I enjoy your perspective and have been following your Fed career from afar since you left the Baltimore Branch where I worked many years ago.

    Do you think that the newly announced rate cut by the Australian Reserve Bank will serve to hasten a cut by the ECB, or do you believe that action by the FRS is still necessary?

  2. Bob McTeer says:

    Hi,

    Hope all is well with you. I doubt that Australia is impt enough for the ECB. The ECB, in my opinion, made a mistake in raising rates recently. I think they would save some face if it looked like they were doing something, in effect, to help us out. But Austrailia won’t hurt, and may help a little.

  3. J.R. Hinkle says:

    Bob:

    Why is the Fed allowing all of the banks that are coming to the Fed’s different “money windows” and then let them hoard the money. Would it not be possible to make these banks sign an agreement that they will loan 80% of “borrowed” funds and make them report each week on their loan activity and if they do not loan than call in the borrowed funds? They might as well be allowed to fail if they are not going to their part in this in restoring lending to the economy. J.R.

  4. McTeer Calls It
    From the Washington Post:

    “The Federal Reserve and a consortium of European central banks today announced a half apercentage point reduction in a key interest rate, a coordinated effort to stave off an economic slump even as they continue struggling to tackle a crisis in global financial markets. ”

    From the NY Times:

    “Central banks around the world cut short-term interest rates by up to half a percent on Wednesday after investors across Asia and Europe unleashed waves of sell orders onto already depressed stock exchanges.”

    It seems like they listened to Bob McTeer, and not William Gross on the amount of the cut.

    Am I wrong?

  5. Bob McTeer says:

    Dear Don:

    It would seem that you are not wrong. But I have to remember that a stopped clock is right two times a day.

    Bob

  6. Donn says:

    Bob,

    A few months ago you commented on Kudlow’s show that you didn’t mind seeing a lower dollar to redress the huge imbalance between our consumption and our producing and saving. But you wanted a “slow leak”, not a fast one. Now that we have this huge deleveraging, do you see a massive shift from consumption to production (and savings) over the next generation? What are the longer term implications of this crisis?

  7. Adam Rodriguez says:

    Mr. Mcteer,

    I just got done listening to your interview on Bloomburg Radio. Quite frankly I find that someone of your intelligence who is in a position to help his fellow American brothers quite disturbing. From quoting pop culture references in answer to pointed questions about the state of our economy, to your obtuse and somewhat embarassing attempts at poetry, you seem to take a somewhat lacksidaisical approach to something that you should be more informed about. Quite honestly, I don’t know if you’ve been marginalized by the hedgemony of the Anglo Dutch Bankers centered in London (perhaps unwittingly), or you are sincerely just an evil person masking your deception and deceit behind a mask of neo-conservativism in defense of the flag. I to am a Patriot, Who believes in the constitution. And nowhere in the constitution does it say that we should be paying for these banks so they can avoid bankruptcy. They should be left to fail. all this “bailout money” is to pay th banks that which will eventually be extracted from their coffers by the Fascist Anglo Dutch that sit on their boards and Speculate on the dollar. Destroying our economy! You know, as well as all of the rest academia that support your Keysian Ideas on economy, that our culture is being destoyed by the devaluation of the dollar ever since it’s been pegged to the cost of oil. and the demise of the Bretton-Woods accord. We need to be back on the gold standard and you know that. All these bad banks need to open their books to an army of Federal auditors to find out the good banks from the bad banks. It worked for Roosevelt, and it can work for us. I think however that you’ve allready been co-opted by the British Oligarcahy and their lot over in London. It’s despicable. Whether you know it or not, you are a very bad person and if you can live with that, which i’m sure you can, your deeds here will compounded a millions times over when you meet your maker.

  8. Tony says:

    Mr McTeer: It's an honor to have found your blog. I love listening to you on Kudlow and Co and CNBC. I appreciate your background and insight. I'm curious about your view of the future of the Euro and it's ability to survive a somewhat divided EU when it comes to policy. Should the Euro go the way of the dodo bird I imagine that would solidify the future of the US$ as the world's currency. I appreciate your thoughts. Thank You, Tony

  9. Steve Lord says:

    Hi Bob, October 8, 2008

    I have listening to you for quite a while on TV, and have been telling a friend recently that I value what you say on CNBC and lLoobberg more than any other economist, because of your eerie way of being right. smile, like you being just about the only one saying the Fed woudnt cut rates at its last meeting, and because I love the way your mind works, you evidence a right brain input that other economists do not.

    He had apoplexy when I told him you favored suspeding mark to market, so he may comment on that here Smile.

    I was struck by this comment by you yesterday.
    “After all, given the way things are going in the markets, what do we have to lose?”

    What this indicates is that all these economists who come on tv and claim “Oh , this is what they should do, this is how to solve the problem” really cant know that with any certainty, no one really knows what will do the trick.

    I guess all we can do is throw what we think will most likel work up against the wall and hope something sticks.

    I had a dream that Microsoft would be selling for above 28 at some point in the next few monts, and my other 3 stock dreams turned out to be eerily correct, so Im throwing that up against my wall and hoping it sticks. Smile.

    Steve Lord, Santa Barbara, California

    U an gioubg Ibana aooiubts tiy Treasyre sec

  10. Cleisthenes says:

    I enjoyed your appearance on NPR. When productivity outstrips the monetary supply you have the risk of a contraction as their is not enough purchasing power to purchase the new production (assuming a constant velocity of money). And so to prevent contractions the primary focus of central banks is to ease the credit (much more so than FOMC operations).
    And yet, for the sake of a simple economic model, if you used a barter system, the items used for barter would have to increase by all parties in order for even economic growth. If all of the barter items were increased for only one or few holders, there would be less incentive for those holders of barter to trade. This is an imbalance.
    Similarly, with a pure gold standard where gold is used for money and there is no paper money, 1) the amount of gold would have to rise to prevent a contraction in economic activity after an increase in productivity, and 2) the distribution of the new gold should not be concentrated. As with barter, if the new gold distribution was concentrated to one or a few holders, those holders would not have an incentive to produce for the sake of acquiring gold. This is an imbalance.
    Of course, we are not on a barter standard and we are not on a pure gold standard. In terms of economic transactions, we are on a mixed cash and credit standard. Focusing on the credit half of this standard also causes imbalances. Much of the economy was held up by activity in the housing and construction sectors because of easier credit. Credit was easily available for this sector. For individuals, credit it is typically used for high cost capital goods or activities rather than general activities, or general economic activities (an imbalance). For businesses and corporations, credit was generally more available to them instead of individuals for routine activities (another imbalance).
    What we should want is a system without such obvious imbalances. Predominant focus on the credit side of this system can to an extent balance economic growth, but because of the imbalances, you get sector inflation with an economy lurching to the left and lurching to the right. One year it’s cars (and a bubble), one year it’s tech (and a bubble), one year it’s construction (and a bubble).
    With a predominant focus on cash (rather than credit) it would be far easier to nimbly increase the monetary supply across the board and reduce the risk of sector inflation. When GDP grows, cash should grow (allowing for velocity).
    Further, we should ask ourselves, that, with increased productivity year after year and decade after decade, then why do we have to work harder than ever before? With increased productivity we should have to work less hard and fewer hours. The focus on credit, rather than cash, has meant an accumulation of debt by the majority of the public. It is systemic. Cash should be the predominant balancer rather than credit.

  11. Robert Geiser says:

    In discussing the financial crisis on 9/26 with an engineer, I suggested that the key cause from my CPA perspective is the mark-to-market accounting rule which throws banks with illiquid mortgage-backed securities into a downward spiral. Three days later Newt Gingrich quotes Chief economist Brian S. Wesbury and his colleague Bob Stein at First Trust Portfolios estimating the “mark-to-market” accounting rule was responsible for 70% of the current crisis. Then on your interview with NPR you suggest the suspension of the “mark-to-market” accounting rule. Hopefully Congress will recognize the economic naiveté exhibited by their Sarbanes-Oxley legislation and implement your suggestions. Thank-you for being a voice of reason.

  12. Robert Geiser says:

    Correction … NBR – Nightly Business Report … not NPR.

  13. Bob McTeer says:

    Tony: I appreciate your kind words. I needed some kind words after just reading the comment two above yours. On my web site, http://www.bobmcteer.com you can find a speech I made on the Euro when it was new. I said it was a political decision rather than an economic decision since Europe didn’t meet the criterion of internal labor mobility needed to make fixed rates or a common currency work well. However, the Euro has been doing pretty well. Now, of course, Europe has a bit of a problem of not having a centralized fiscal authority to help deal with their cirsis. Bob

    Steve: Thanks, especially about the right brain comment. I agree with you that most “experts” pretend to know things that can’t be known. They get away with it because TV and Radio have an interest in going along with the fictions. Together there is a whole industry based on that fiction. But, hey, I guess I’m part of it. I just can’t bring myself to take myself so seriously. Bob

    Cleisthenes: Your comments reminded me of a line I read recently. I think it was from James Grant. To paraphrase, it was something like knowledge or progress in science and engineering is cumulative, but in finance it’s cyclical. Bob

    Robert: Maybe you should join the bandwagon on mark to market. I’ve been holding my breath sence the bailout package past, since it gave an implied nudge to suspension. I don’t know why the SEC can’t take the hint. I think they want to please their accountants more than help us out of this mess. Bob

  14. MW says:

    How do you reconcile what is supposedly one of the great lessons of the Japanese banking crisis, namely that it’s important to quickly write down losses on bad assets, with the suspension of MTM accounting?