Monday, October 27, 2008

As Another Week Begins the Federal Reserve Remains at the Center of Efforts to Alleviate Growing Financial Woes

Practicalities the Only Limit to Fed Action, Financial Times
16 Banks Plan to Seek U.S. Aid, New York Times
U.S. Regional Banks Eye Deals With TARP Cash, Financial Times

Since the beginning of the United States government's official efforts to limit the effects of the worsening global financial crisis, the already important Federal Reserve has emerged as an even more significant player in the U.S. financial marketplace. Each day seems to bring the announcement of another massive infusion of cash by the Federal Reserve into the ailing American financial community. Recent examples of the Federal Reserve's increasingly aggressive intervention include the $540 billion to buy bad debt from money market funds, over $30 billion in Troubled Asset Relief Program (TARP) funding to 16 regional banks such as SunTrust and State Street Financial, and a $5 billion loan to GE financial.

In addition to its newly heightened activity in the areas of cash infusion and provision of liquidity to banks and financial institutions, the Federal Reserve is also getting attention for its more traditional function: regulation of interests. While many experts, including many economists within the Federal Reserve system, believe that a further cut to the federal funds interest rate is a less important element of the solution to the global financial crisis than the continued infusions of cash and liquidity to the marketplace, a half point cut is still expected from this weeks Federal Reserve meeting.

While monetary policymakers and experts alike, both in the United States and globally, are not convinced that a cut in U.S. interest rates will have a significant impact on the financial predicament, they do believe that interest rate cuts in other global economies are necessary and that U.S. cuts may inspire similar action throughout the global community.

Discussion questions:
1) For how long should the Federal Reserve continue to play a heightened role in providing cash/liquidity to American institutions?
2) Will a cut to the Federal Funds interest rate have an effect on the financial crisis? Will it be positive?
3) Does another cut to interest rates in the United States increase the risk of deflation?
4) Will a cut in U.S. interest rates lead other countries to cut their interest rates? Is a global cut in interest rates needed?

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