The Case for a Rate Cut

The arguments for a rate cut are the loudest and come from all over Wall Street.
According to a report released Aug. 30, the U.S. economy grew 4% in the second quarter, but it only grew 0.6% in the first quarter. Average those out and growth is barely above 2%. This is a "soft underbelly" for the economy to begin with, says Keith Hembre, a First American Funds economist.
On top of that, the credit crunch poses a big threat to the economy. It started with subprime mortgage problems but has spread to other parts of credit markets. The stock market has suffered, too, but in comparison it's doing O.K. and has even settled down a bit. Major indexes are positive for the year.
Many argue the broader economic effects of credit market troubles should be the Fed's real concern. A credit crunch does threaten borrowing by companies and individuals throughout the economy. "If you don't have lending, you're going to have a recession for sure," says Kurt Karl, chief U.S. economist at Swiss Re (RUKN). It could take months for credit problems to show up in economic data. Eventually, that will force the Fed to act, but Karl worries it could be too late.
The Federal Reserve has "bought some time" by adding liquidity to the banking system through its cut in the discount window rate, says Avery Shenfeld, senior economist at CIBC World Markets. But it's not enough to counteract the tightening on credit markets, which have effectively raised interest rates. A rate cut "isn't so much an easing in policy, but undoing a market tightening," Shenfeld says.
Many say Bernanke and the Fed simply haven't been bold enough in responding to the market turmoil. "He's been holding back too much," says Bob Ried, president of Ried