It doesn't add up
The Fed struck again yesterday afternoon with another .75 percentage point haircut for the Fed funds rate. Since August, this rate has fallen from 5.25 to 2.25 while inflation has risen from 2.5% to well over 4%.
Mungowitz will probably kick me off this blog for beating this particular horse so often, but I think this is bad policy. The only thing I think these rate cuts have done is reduce the greatly feared ARM re-sets that were on the near horizon. However, we now pretty much know that the real problem for homeowners is not payment re-sets, but that home prices have fallen (or stopped rising) enough to make their positions negative. We have too much housing still at too high a price and the price re-set is slow. One thing that would help would be to stimulate the demand for housing with lower long term interest rates, but the current Fed policy of allowing inflation to rise has 30 year mortgage rates "stuck" well above 6%.
In sum, while I applaud the lender of last resort actions the Fed has been taking, I see little good and a lot of ill coming from these unrelenting Fed fund rate cuts. They won't stave off a possible recession, nor will they solve or notably improve the housing crisis. They will push up inflation and keep long term rates higher.