The Housing Chronicles Blog: The "Mild" Fed

Friday, December 14, 2007

The "Mild" Fed

Writing in Business Week, writer Peter Coy suggests that the Fed's lowering of rates and creating the Term Auction Facility will certainly help, but more will be needed:

What's becoming clear is that market frenzies take their own course, and there's no easy remedy. The core problem remains: Many banks loaded up on iffy assets such as subprime loans that are continuing to lose value as the U.S. housing market keeps sinking. They're reluctant to make new loans because they don't trust their borrowers, and they want to husband their cash in case they have to make further writedowns. The Fed's Dec. 12 plan, while it should ease stress in the system, "does not fix in any shape or form the source of the problem," says Lena Komileva, Group G7 economist for Tullett Prebon, an interbank broker.

And yet today's report of higher-than-expected inflation could also mean that the Fed can't cut interest rates as much as it would like, prompting a delicate balancing act between (a) aiding the housing market; and (b) fighting inflation.

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