Confusing Signals


Less than three weeks after the Federal Reserve’s last interest rate cut, an additional quarter-point cut was announced October 16 due to “growing caution by lenders and unsettled financial markets, as well as the need to sustain economic growth” (Wall Street Journal).

Yet, only four months earlier, Alan Greenspan called American economic conditions “as impressive as any I have witnessed in my nearly half-century of daily observation of the American economy.”

What’s going on here? Is the Fed trying to “sustain economic growth” by pumping unwarranted confidence into investors? Or did they react out of panic, trying to force growth for fear of further deterioration? Are there more bad loans and impending hedge fund collapses they aren’t yet making public (like the recent $3.6 billion bailout of the highly speculative private investment Long Term Capital Management which lost big when its sophisticated trading strategies went wrong)? Is the Fed trying to sustain the unsustainable?