U.S. Federal Reserve Chairman now has more leeway to reduce interest rates further and quicker, after concluding that inflation concerns have subsided enough, Bloomberg News reported Wednesday.However, economist David Wang told BloggingStocks Wednesday that although there's a tendency among some media outlets "to fixate on the Fed and interest rates," investors should concentrate on the multiplicity of tools at the Fed's disposal, as well as the global effort that Wang believes is necessary to prevent both a U.S. recession and a major slowdown in global growth.
"Look for the Fed's term auction facility to play just as important a role as the Fed's rate cuts in the months ahead," Wang said.
Last fall, the Fed established a term auction facility to provide short-term liquidity to banks. Bernanke has underscored that the term auction facility will remain open, "for as long as necessary."
In addition, Wang said the Fed, perhaps in conjunction with the U.S. Treasury, may have to coordinate "an intervention or private cash infusion for any of the major mortgage insurers" should one's solvency come into question.
In Wang's interpretation, mortgage insurers, primarily MBIA (NYSE: MBI) and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI) and MGIC (NYSE: MTG), "cannot be allowed to fail." A failure by one would reduce banks assets further, spark a new round of selling on Wall Street, with numerous, long-term, negative consequences for the stock and bond markets, and for the U.S. economy.
"The mortgage insurer issue is one that will take quarters, if not years, to resolve," Wang said. "From an economic foundation and financing standpoint, it is just as important as lowering rates to stimulate economic activity."
More rate cuts ahead
Regarding, key short-term interest rates, Wang said there are more rate cuts ahead, and he expects the Fed to lower interest rates by 50 basis points when it meets January 30. Wang said the Fed "should cut rates by 75 basis points," but senses that the Fed will do a 50-basis-point cut, with at least one additional cut to follow a month or so later.
The Fed, in an emergency monetary policy action, cut key interest rates Tuesday morning -- cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.
The focus: Revive the economy
Wang said critics of rate cuts "have pretty thin arguments at this juncture." If inflation accelerates to unreasonable levels, or if growth unexpectedly surges well beyond sustainable growth, "the Fed can always re-raise rates." Wang added that he doesn't see high inflation or giga-growth surfacing in the U.S economy in 2008.
Wang concluded, "The Fed is not the only part of this recovery equation. We will need many other players, fiscal stimulus, foreign central bank monetary policy easing, and probably more foreign direct investment, but the Fed is a major player and their focus on growth is pivotal to getting the economy moving in the right direction again."
Chasing Value: 2009 blazing picks -- Q3 review 
Happy holidays! Google giving away free Wi-Fi 
Dr. Doom Nouriel Roubini believes the bubble is about to burst
Reader Comments (Page 1 of 1)
2-14-2008 @ 5:26PM
Wily said...
The "investment class" is socialistic. When they scream the Fed jumps. We'll do whatever we can to help you out. For the rest of us it's a capitalistic society. You're on your own.