Are you people cutting fifty basis points on the fed funds rate and fifty basis points on discount rate. And now the question did they get it right. Who better to ask are two people who have been in that room in their frist television appearance since retiring from the fed let's bring former fed governor Susan Bies and Robert Mcteer from present Dallas Fed also with us, and there could be no better time to have both of you with us with your perspective. Susan, you were there room march and your comment was…I…is it clear to me that Fed has to cut at this meeting and yet we got fifty on both rates, are you surprised? Did they make a mistake?

Well, I am surprised at the fifty basis points on the federal funds rate. I didn’t think that they needed to go that aggressively on the fed funds rate; I think the discount rate was a welcome change. But the fed funds rate did surprise me to go fifty. I would guess that would is based on the statement is what they are concerned about the forecast. We know that the large part of this mortgage difficulty is only going to get worse in the next year or two, is we continue to have more and more of the teeth rate mortgages we pricing upward by a couple points and more for many bar walls. And so the impact on the housing sector is only gonna intensify. And my guess is by going all of once now they are trying to jump ahead what they are likely to see in the housing impact.

And Robert, where do you fall on this debate that Steven L was just raising which is, is this the Fed's effort to say here we go, we gonna surprise everybody, we gonna throw out a big cut exclamation point, we are done or did they not say they are done.

Well, as we learned the other day, Fed people don’t use exclamationto point until i retire. Ur…I think it was natural for them to make that reference and there might be a little bit of overborn to throw out this potential dissenter in it. But let’s face it, inflation is still an issue. However, I think that is exactly the right thing, and they did what I call for them to do in my live blog posting if you wanna look it out.

I did look it out, but I read it. I see here you were completely right. Susan, can I ask you a question though? Since you were there in march, how much dissent was there, in your view, in the room when they went through this decision? beacuse it wasn't everybody expected, no one knew what to expect, I can’t imagine it was easy when everyone says “Ok, unanimous fifty, fifty!”

I would think there would have been a fairly robust discussion around the table. Now There is few new members around table for the time i was there, we got couple of new president in the room. And I don’t really know what they may stand on this. But I think the fact we have such a unprecedent experience going on in the subprime market. Usually when we have problems with mortgage defaults we are in a general recession. That isn't happening here. It also hits one interest rates are rising quickly. That isn’t happening. These are all due to the structure the individual mortgage loans and the teeth experience that they had. So that makes difficult to we look past at history to do the forecast. So I imagine part of the discussion was around how to look at the forecast develop broader economic impact. Coz a lot of companies are still reporting good earnings, retail sales are good, so the economics in the real economy right now are looking like there are still sound out outside the housing market.

But what about another issue that you raised in your blog? You said the reluctance to borrow, you said if we cut interest rates, people may be more interested in borrowing money, but won’t solve the bigger picture of the problem which appears to be a reluctance to lend which as you are saying in your blog is not helped by lower interest rate. It almost makes me think the Fed isn't really relevant here they can’t solve the problem

Well this thing leads to a recession that i do think the odds of that have gone up considerably the easing will help moderate the recession it might even help ward it off. I do think though this is a little differ(ent) kind of credit crunch back in the early nineties the credit crunch involve both the reluctance to lend and the reluctance to borrow. As far as I know right now it’s only lenders that are afraid to lend, borrowers are eager. You don’t really stimulate lending by lowering interest rates.

Alright, Susan and Bob, thank you very much.

 


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