US rate cuts: Another drink for the alcoholic
Slashing US interest rates is a short-term fix for America’s economy – and thus possibly for the world’s finances – but it is a solution that resorts to the problems that created this mess.
The last time the Fed made an unscheduled cut in interest rates was immediately after 9/11, and though done with the best intentions, it started the low-cost credit regime on which the world became dependent.
The timing, following a crash in world share prices and before US markets re-opened after a holiday, suggests the Fed was more interested in saving Wall Street than saving US industry, but it simply stores up problems for later. Lower interest rates mean a lower dollar, which means higher inflation – which is no good for American consumers or US business.
That is why the Bank of England will not rush to follow the Fed as it did after 9/11. Apart from displaying panic, the Bank would be encouraging inflation (for which it gets the blame) at the expense of boosting the economy (which is not its responsibility). The UK Bank will thus make small cuts at scheduled times.
Anyway, in this changed economic climate, interest rate cuts are not going to have the stimulus they had in recent years. The UK public is not in a mood for consuming, and even if US banks would lend again to American sub-prime borrowers, do not expect them to go on a spending spree.
But having made this grand gesture to save share prices once, what does the Fed do next time? And the time after that?
The Fed ought now to be gently raising rates to strengthen the economy again, but it cannot do that. The deep rate cut is like giving an alcoholic one more drink to keep him happy when the long term solution is to wean him off the stimulant. Unfortunately the US economy is addicted.
