The 'Stealth Cut' And Fed Credibility

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Earlier this week we pointed out that the so-called “stealth rate cut” was both damaging the Fed’s credibility and probably indicated that the Fed would have to cut by more than a quarter of a point if it intends to have a real impact on the markets and the economy. That idea seems to be catching on.
For about a month, netting out some very short term fluctuations higher, the effective federal funds rate has been well below the Fed’s target of 5.25%. Now from the Wall Street Journal’s blogs we learn that Tom Gallagher, of the ISI Group, has issued a note to clients saying that a quarter point cut would not achieve any monetary easing.
“All it would be doing is ratify the easing that had taken place for technical reasons… It does seem that if the Fed really does want to ease financial conditions, a quarter point cut in the target rate wouldn’t do it,” the Journal’s Real Time Economics quotes him as saying.
And on Market Beat, we learn that the credibility damage theory first explained to us by an anonymous credit industry veteran has been repeated by economist Robert Brusca. If the Fed is targeting one interest rate while achieving another, either they’re ineffective, incompetent or liars.
But since you’ve been reading DealBreaker all week, you already knew this. It’s just nice to see that other people are starting to notice this stuff.
Stealth Rate Cut? [MarketBeat]
Implications of Fed Funds Undershooting Target [Real Time Economics]

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