Tuesday, September 18, 2007

No easy choice

In a few hours the Fed will announce its decision on the fed funds rate, same or lower, 25 basis points or 5o basis points. Holding firm will disappoint the market and send equities down. 25 basis points is a meaningless wimp out. 50 basis points is a short term solution that is incredibly dangerous for long term financial health given what it will do to the soundness of the dollar. It would sow more seeds for future inflation and higher interest rates.

As a new Fed Chairman it may be impossible for Bernanke to not lower rates. That's too bad because it is an option that should be considered seriously. The language of the Fed's comments could show extreme awareness of the difficult situation but still not capitulate with an interest rate cut. That would shock the market but perhaps create a foundation for responsible risk taking and, after a pretty awful short term sell-off, put an end to this creeping credit and market sickness. Sooner or later we'll need to pay up. It may be best to get it over with and go on from here with a chance of restoring the credibility of our currency.



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