Sunday, December 02, 2007

Fed Cuts, Again?

Sources: CNN Money, Financial Times, Chicago Tribune, San Francisco Chronicle

Will the United States cut interest rates again? The Federal Reserve suggested last month that it would likely not cut interest rates again, but it is expected that Federal Reserve will interest rates within the next two weeks. Ben Bernanke (Chair of the Federal Reserve) stated that the tight credit conditions, high energy prices, and housing crunch will lead the central bank to be “exceptionally alert and flexible.” Over the past week, stock markets in London, Hong Kong, Japan, and the US all gained on the Fed Chair’s comments. On Friday, London’s FTSE closed 2.7 percent higher. The Dow Jones rose 59.99 points, gaining three percent for the week.

Domestic US economic reports also led to speculation that an interest rate cut is coming. Spending and income slowed in October—and the actual growth in spending was not due to additional purchases but rather increased prices. These are signs of a slowing economy. Furthermore inflation is exactly on par with economists’ forecasts, giving the Fed Reserve a go-ahead for interest rate cuts. Some senior economists believe that, in light of the slowing economy an interest cut is recommended. According to one, it’ll “lower stresses on the banking system.” However, it could add pressure to the weakening dollar.

Question: Will interest rates drop to the lows from several years ago? And will this be the last time the Federal Reserve cuts interest rates in the near future?

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