I’m often guilty of over-simplifying, but I just don’t get how the Fed hopes to ease current Wall Street woes by reducing interest rates. It seems the opposite of what should be done.
If I remember my economics lessons from long ago (and some from not-so-long-ago), the Fed sets monetary policy and regulates interest rates to control the flow of money. Lower interest rates (just like lower prices) increase demand and allow more cash to flow into the national marketplace. Higher rates (just like higher prices) reduce demand, constricting the supply of money.
If the present financial problems were triggered by people borrowing more than they could afford (spurred in part by low-interest rates and relaxed qualifications for credit), how is it a benefit to allow EVEN MORE cash to flood the market?
In my opinion, it’s not. Because a Fed decision to lower its interest rate is usually perceived as “good” news, today’s announcement was made to counter all of the “bad” news. The Fed’s decision is not sound monetary policy, but somebody thought it was good political policy. Come here to learn some more about managing your money.
What am I missing?