Bernanke: Too Late and Too Little

If anyone doubted the seriousness of the pending downturn (see my entry for yesterday), today’s Fed action should put all doubts to rest. The Fed’s three-quarter percentage cut (75 basis points in Wall Street lingo) brings the target fed funds rate down to 3.5 percent – 1.75 percentage points lower than it was in August, the lowest it’s been since August of 2005. The move also marks the first time the Fed has cut rates by over a half a percentage point since 1982.

Why? Bernanke and company are finally getting how dangerous things are. The risk of inflation, even with $100 a barrel oil prices, is far lower than the risk of recession, or worse. The Fed statement accompanying its decision explicitly pointed to “deepening of the housing contraction.” Indeed. But still too little, too late. And unless the Fed’s move is coordinated with other central banks around the world (the European Central Bank, for example, is raising rates rather than lowering them), it will be even less effective. Capital markets are global, remember?