ND Expert: Fed’s rate cut risky for future

January 23, 2008

With the biggest one-day reduction of interest rates in history announced Tuesday, the Federal Reserve’s attempts to resuscitate the U.S. economy could be a mistake, according to University of Notre Dame economist Nelson Mark.

“The rate cut doesn’t speak directly to the problem at hand, which is a seizing up of bank credit. Instead, I would have thought that the Fed would try to bolster confidence by acting as a lender of last resort and providing liquidity to the payments system,” said Mark, who specializes in international asset pricing and exchange rate economics.

The Federal Reserve dropped interest rates by three-quarters of a percentage point, to 3.5 percent.

“The headline inflation rate for 2007 was around 4 percent,” Mark said. “Setting the real Fed funds rate at 3.5 percent has a good chance of accelerating inflation in 2008, which could turn out to be a huge problem for the Fed down the road.”

Last year’s steadily rising inflation provided an environment in which companies could raise prices with relative ease.

“If we have another round of cheap credit that adds to consumer demand, we run the risk that firms will raise prices by even more in the future,” Mark said.

Source: University of Notre Dame

Explore further: When Fed locks up funds, small businesses suffer

Related Stories

When Fed locks up funds, small businesses suffer

September 17, 2015

When the Federal Reserve raises interest rates to slow down a speeding economy—effectively raising the price of money—banks often sell down their stockpile of securities to keep the financial assembly lines going. That's ...

Feds probe VW air bags after inflator ruptures in Missouri

August 18, 2015

A June collision between a Volkswagen SUV and a deer in which a side air bag inflated with too much force has triggered a federal investigation and raised questions about the safety of newer air bags made by Takata Corp. ...

Team to report on broadband wireless connection to moon

May 30, 2014

When can people expect to live and work in space? That is quite a question, but scientists are not afraid of asking yet another: assuming people are living and working in space, how are they to communicate with space stations ...

Recommended for you

The culinary habits of the Stonehenge builders

October 13, 2015

A team of archaeologists at the University of York have revealed new insights into cuisine choices and eating habits at Durrington Walls – a Late Neolithic monument and settlement site thought to be the residence for the ...

Ancient genome from Africa sequenced for the first time

October 8, 2015

The first ancient human genome from Africa to be sequenced has revealed that a wave of migration back into Africa from Western Eurasia around 3,000 years ago was up to twice as significant as previously thought, and affected ...

Mexican site yields new details of sacrifice of Spaniards

October 9, 2015

It was one of the worst defeats in one of history's most dramatic conquests: Only a year after Hernan Cortes landed in Mexico, hundreds of people in a Spanish-led convey were captured, sacrificed and apparently eaten.


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.