There’s a broad consensus emerging among economists for a 50bp cut in interest rates from the US Federal reserve on Wednesday.
But there’s also a sense that it won’t be all that effective. Martin Wolf, the FT’s chief economics commentator, writes that the Fed will have to be ruthless:
…on its own, monetary policy will not act swiftly unless employed on a dramatic scale. The case for fiscal action looks strong.
There are big risks, says Wolf, in relying on rate cuts: indefinite continuation of excessively low national saving, loss of confidence in the US currency, higher inflation and a further round of asset-bubbles and credit expansion.
Dominique Strauss-Kahn, director of the IMF, is in some agreement. Also writing in Wednesday’s FT:
…monetary policy may not be enough. Why? There are two main reasons.
Firstly, says Strauss-Kahn, “the transmission mechanism for monetary policy is damaged” – to the extent that cuts won’t stimulate investment and consumption as fast as usual. Banks, in particular, are responsible for this, keen as they are to circle their wagons and reinforce their balance sheets.
Secondly, a slowdown may be harder to shake off than in previous instances. The US may be looking at an “old world” style recession: protracted and sluggish. Consider that US households will need to spend a great deal of time rebuilding savings, after years of housing and equity-driven growth.
It’s on the back of such analysis that the IMF has slashed its global growth forecasts.