Opinion pieces and speeches by EPI staff and associates.


[ THIS BLOG ENTRY WAS POSTED TO TPM CAFE ON MARCH 18, 2008. ]

Fed lowers benchmark interest rate by 50 points (a satire...)

By Jared Bernstein

In a surprise move aimed at stimulating moribund financial markets and the larger economy, the Federal Reserve surprised markets with an unprecedented 50 point rate cut, taking their target rate down to -47%.

The statement accompanying the surprise cut was also unusual, employing bolder language than is typically the case. For example, the phrase “the committee judges inflationary and growth risks to be roughly balanced” was changed to read, “Screw it! We’re going nuts over here! You got a financial problem? Need some fast cash? We’ll pay you—that’s right, you heard us—to borrow money from our bank.”

Government officials commenting on the Fed’s unprecedented move were surprised but supportive. Treasury Sec’y Paulson said, “While we do not typically comment on Fed policy, I will say that I myself just borrowed a million bucks and made a very tidy profit on the trade.”

Wall St, however, was critical, continuing to press the Fed to go further.

“While a negative interest rate of this size will help, the 50 point cut was far too small to make up for the losses we’ve suffered. Most folks down here were expecting a 75 point cut, ” noted Joe Whiner, a trader at Boom’n’Bust investment bank. Whiner pointed out that while his trades lost his firm “only $32 billion” last year, his bonuses have only amounted to $30 billion. “I’m still waiting for the Fed makes up the difference,” he said.

In a related move, the Federal Reserve not only lowered the discount rate—the rate at which banks can borrow directly from the Fed—by 100 points to -96.8%, but physically expanded the window itself. As noted in today’s statement, “It has been our judgment that the size and appearance of the discount window itself made it uninviting to commercial banks. Today’s actions rectify those shortcomings by expanding the window and putting up some lovely floral-print curtains, giving it a living-room feel, while maintaining the decorum of the central bank.”

“It’s really pretty,” said one banking industry spokesman. “Given the huge negative rate and the attractive new design, any stigma associated with borrowing from the discount window is a thing of the past.”

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Jared Bernstein is senior economist at the Economic Policy Institute in Washington, D.C.

[ POSTED TO VIEWPOINTS ON MARCH 27, 2008. ]