Economy in Turmoil

As we are on the brink of the Federal Reserve meeting tomorrow, many people are worrying about the country falling into a recession. There is speculation that yet again, the Federal Reserve board will cut interest rates at their meeting tomorrow in attempts to prevent a recession. But what some people are starting to ponder now is the idea of the Fed accepting the fact that a recession is going to happen and should embrace it instead. According to CNN, several economists disagree with the Fed in using more rate cuts to spur economic growth, and instead believe that a recession might be the “best medicine” for the economy in the long term. The reasoning behind this is that they don’t believe Fed cuts can fix what already is ailing the economy, because it is dealing with a problem of confidence. Since this is a minority view thus far, I will discuss it further below for readers to gain a better understanding of this opposition. The view of the majority coincide with the Fed’s movements and believe that rate cuts help give the market more liquidity and say that such a move is necessary for the weakening economy.

Rate Cuts – The Opposition

There is increasing speculation among economists that the country is already dipping into a recession and future rate cuts by the Federal Reserve Board won’t be able to prevent this from happening further. According to CNN, "The problems the markets are facing are not due to interest rates being too high. It's a lack of confidence," said Barry Ritholtz, the CEO and director of equity research for Fusion IQ. They say that rate cuts are causing a sharp decline in the dollar, which in turn are causing record prices for commodities such as oil, which we have seen dipping into consumers’ pockets as gas prices soar across the country. Even food, beverage, and transportation prices are going up, putting a squeeze on the disposable income of consumers. Although prices in these items have risen minimally over recent years, decreasing home prices and tighter credit has put a crunch on consumers’ pockets. Further rate cuts are speculated to just add “fuel to the fire” and won’t help the real problem that is ailing this economy, which is a lack of confidence in lending, with significant distrust among lenders.

According to CNN, one of the critics of Fed cuts is even on the Federal Open Market Committee that meets to decide interest rate moves. Dallas Fed President Richard Fisher, who was the only one to vote against the rate cut in January, has continued to talk loudly about inflation fears recently. He thinks the Fed shouldn’t be as worried about a recession as it has been., and is expected to vote against another rate cut. He says the Fed’s obligation should be to prevent inflation from happening in order to sustain long-term employment growth. Fisher also hinted around at the problem of the weakening currency in our country by saying that "In today's world, where investors can move their funds instantly from one currency to another to avoid depreciation, the price central bankers pay for high inflation is much higher than in the past.”

My Proposal

The Fed Reserve Board has already made significant cuts in rates and I think this has done enough to try to pump liquidity in the market and increase consumer spending, but not enough to fix the problem. I do believe too much is too much, and that further rate cuts will harm the economy of our country. I am taking the view of the minority and saying that we are facing a problem of confidence within our economy, and that can only be fixed in the short-run by lowering rates. So what happens if we don't lower rates further? Yes, we might have to endure short-term pain in our country in order to have long-term growth and gain after all. I think this is a natural cycle of any free-market economy. Going back to 2001, when the Federal Reserve faced a major decision following the burst of the dot.com "bubble," and the terrorist attacks of 9/11, Alan Greenspan had to face a similar dreadful problem. He made a decision to lower interest rates and sustain them at a low level. Now, the after-math of his decision has been passed to Ben Bernanke, as the new chairman of the Federal Reserve Board. Currently, Mr. Bernanke has already been masking the problem by lowering these rates again and again, and tomorrow he has to decide whether to continue to do so, or let nature run its course. If he decides to give our economy another dose of a "quick-fix" like Greenspan did following the events of 2001, our economy will possibly be helped in the short-run, but might just mask a problem that will inevitably have to be faced sometime in the future, and be much worse. On the contrary, if he decides to let the market run its natural course, it will hopefully revive itself from all the short-term "quick-fixes of the past," and will turn around to give us a positive, long-term economic outlook. I think this view is hard to fathom and looked down upon because of the fear of the near future and the pain that consumers will have to face. However, I believe it is a sacrifice we must make to prevent a worse crisis in later years due to continually masking this problem by lowering rates. Then confidence will just naturally find its way back into the markets.

Hope for the Economy

We are only a day away from the Fed meeting that will make the decision of whether to cut rates or not. Only time will tell if their actions will prove or disprove these notable economists’ and will either help or hinder our weakening economy. Follow the news to see what action they decide to take, and continue to follow the markets as it has been predicted to be an economical roller-coaster for the next couple of years. Hopefully, Ben Bernanke and his counterparts will push our country in the proper direction, and will balance the least amount of financial burden on consumers’ wallets during this time of turmoil. What stance do YOU take on the economy?