Fed Cuts Fed Funds Rate 3/4 Point

Today the Federal Reserve cut the fed funds rate by 3/4 of a point lowering the key short term banking rate from 4.25% to 3.50%. After almost six months of market volatility the Federal Reserve finally took a decisive step that will start to end the credit crunch that has been gripping the nations economy. But did the Federal Reserve do enough?

Since early August I have been saying and explaining why the fed funds rate was too high. What's Causing Turmoil in the Markets was written on August 12th and explains in detail why the fed funds rate was too high and how that was affecting the US economy. Today the Federal Reserve has finally reached a point where they are getting into a range where the fed funds rate is not wildly overpriced under current conditions.

When the Federal Reserve cut the Discount Rate in August I wrote Did the Fed Do Enough? Explaining why the cut in the Discount Rate was likely not enough to prevent the economy from sinking.

When the Federal Reserve cut rates again in September I analyzed that decision and again reiterated how the Federal Reserve had caused all the problems in the first place by massively increasing the fed funds rate over a very short time frame, Analysis of Federal Reserve Interest Rate Cuts.

As conditions continued to worsen in the economy I wrote about why and explained that when financial institutions start taking massive write-offs deflation is far more a threat than inflation, Are We Headed for Deflation?

In early December when the Federal Reserve cut rates again I explained why their timid moves where still not enough and how they were making the same mistakes as the Federal Reserve did in 1929, Federal Reserve Cuts Rates but Repeating Same Mistakes as 1929-1930.

When the Unemployment Rate rose earlier this month I wrote another article explaining why and detailing why the Federal Reserve was to blame, Unemployment Rate Rises, Fed to Blame.

All along I have kept the focus exactly where it needed to be, on the Federal Reserve. The Federal Reserve caused the credit crisis by jacking the fed funds rate up by 5.25 times over a three year span. To understand just how devastating that is to an economy, even with the 3/4 point cut in the fed funds rate enacted today, if the Federal Reserve increased the rate by 5.25 times today we would end up with a fed funds rate of 18 3/8. That, in effect, is what the Federal Reserve did to the US economy from 2003-2006.

So did the Federal Reserve do enough today by cutting the fed funds rate by 3/4 of a point? No, but at least the Federal Reserve has finally lowered the rate into a range that will stop hurting the credit markets as bad as it had been. As I explained in Analysis of the Federal Reserve Interest Rate Cuts, the critical question always facing the Federal Reserve is does it have interest rates in the proper range given the current economic conditions? The answer is still no today but the fed funds rate is closer to the proper range than it was yesterday.

In the end, as I explained in What's Causing Turmoil in the Markets back in August of 2007, the biggest problem the US economy has been facing is that the solution to ending the credit crisis must come from the very same people who caused the crisis in the first place. For the most part, the same people who raised the fed funds rate by such a massive amount over a relatively short time frame are the same people who must admit their massive mistake and then try to fix it. That is problematic to say the least. (Alan Greenspan was replaced by Ben Bernanke as Chairman of the Federal Reserve over the time frame and the lions share of the blame for the massive rate hikes must go to Greenspan since he was the architect of those rate increases. Bernanke can be blamed for going along with the final rate increases and then for reacting far too slowly to the deteriorating conditions those increases caused.)