The US Federal Reserve has panicked taken rare ‘emergency action’ by dropping interest rates 75 points to 3.5% - and despite all the cynical sniping from know-it-all armchair economist bloggers, the move does seem to have fended off the widely expected stock market crash that everybody was expecting today. Monday was a national holiday in the US, so while stock markets were collapsing around the globe, the Americans had a little room to breathe and managed to pull this rabbit out of the hat just in time to stop the Dow and the Nasdaq following everybody else off the cliff when they opened this morning.
The problem is though, it’s been seen as a very desperate measure and nobody’s sure if the feel-good effect of the rate cut will last long enough to stop global markets continuing their descent into hades in the near future. As Felix Salmon at SeekingAlpha points out “The Fed is charged with keeping employment high and inflation low; it’s not charged with protecting the capital of investors in the stock market. So this action smells a bit like panic to me…”
Central banks can’t just slash interest rates every time the stock market starts to go pear shaped - that goes against the whole principle of free markets, it’s not up to governments to bale out investors and speculators with cheap money funded by the tax payer. On top of everything else, keeping interest rates low means that more people can afford to borrow more money, and this contributes greatly to inflation since people are willing to spend more, and it also means the value of the dollar as a currency will suffer. But of course the big question is what will happen when the global markets see through this desperate last ditch attempt to create a bit of confidence in the US (and by association, the global) economy? What rabbit can the Fed pull out of its hat to stop the next big crisis?
