Fed May Cut Rate Below Inflation, Risking Bubbles - Essay Example

Article Analysis The article in question is d Fed May Cut Rate Below Inflation, Risking Bubbles andit has been written by Craig Torres and Simon Kennedy who give their analysis of the doings of the Federal Reserve. Essentially, this has put interest rates below inflation therefore in the simplest economic terms; it has become cheaper to borrow money than the cost of inflation. This is certainly a unique situation since the article considers this to be an emergency measure taken by Reserve which carries substantial risks while giving the entire economy a shot in the arm.

As noted by Mishkin (2006), the interdependence of international monetary systems has created a situation which no economy can be considered an island on its own insulated from developing situations in other economic regions of the world. The interest rate reduction by the Federal Reserve has caused shockwaves across the oceans and financial markets around the world have been forced to reduce their interest rates as well (Torres and Kennedy, 2008). Additionally, as interest rates are reduced, investors can consider it more feasible to invest in securities which carry more risk since the rewards for investing in banks seems less attractive (Mishkin, 2006).

This means that stocks become more desirable due to the higher returns on investment provided by them. The interest rate cuts has helped the stock markets as reported by the article where Standard and Poor’s 500 Index rose almost a full percentage point and even the global stock markets showed a positive turn as the MSCI World Index also displayed an increase of 0.8 percent (Torres and Kennedy, 2008). However, there does appear to be some conflict between what is happening in the economy as compared to what the Federal Reserve is doing since the steps being taken by them are usually taken during a recession.

While some signs in the economy are recessionary, it is difficult to say that alarm bells should start ringing so quickly in the offices of the Federal Reserve (Torres and Kennedy, 2008). Perhaps a more cautionary approach would be more justifiable since such levels of interest rates could create economic bubbles where many investors could lose billions.Such a warning is given quite clearly in the article itself which warns that credit seekers would get a very good bargain at the moment but this could lead to over lending by the banks in effect leading the country towards another stream of consumer credit problems (Torres and Kennedy, 2008).

With rising levels of unemployment and increasing costs of energy, the steps taken by the Federal Reserve might just hasten us towards a recession than avoid it from coming in the first place. No doubt there are several huge question marks about the future of the American economy but the manner in which the Federal Reserve has cut interest rates could be a case of too much of a good thing. Word Count: 524Works CitedMishkin, F. 2006, Economics of Money, Banking and Financial Markets, Wiley.Torres, C.

and Kennedy, S. 2008, ‘Fed May Cut Rate Below Inflation, Risking Bubbles ‘, [Online] Available at: http://www.bloomberg.com/apps/news?pid=20670001&refer=news&sid=amPLl6VFY8FM