The Federal Reserve’s interest rate cut does not help Americans

Axel Merk, September 25, 2007

In our assessment, the Federal Reserve’s (Fed’s) interest rate cut was wrong. Forget about the “moral hazard” of whether the cut would plant the seeds for further bubbles. Lowering interest rates is wrong because it will do few any good, but cause many a lot of harm.
As the most imminent result, the U.S. dollar has accelerated its decline versus hard currencies. When a country’s central bank cuts interest rates, it is rare that the currency reacts in textbook fashion and declines more than a token amount versus other currencies; that’s because, amongst others, lower interest rates may boost growth and make the currency more attractive for investments. Not so this time with the Fed’s cut: lower interest rates are unlikely to boost economic growth. The reason? The markets are facing a valuation problem, not a liquidity problem. MERK