Dollars and Jens
Sunday, August 19, 2007
Just to quibble, the discount rate isn't set by the FOMC; it's set by the board of governors alone. The rest of the FOMC is supposed to chime in on the open market operations policy, viz. the fed funds target. The actual "action" taken, though, was just by the board of governors.
It does look increasingly likely that a cut in the funds target itself is forthcoming, but I think if I were on the FOMC I'd be glad not to have a meeting until a month from now. What needs to be done can almost certainly wait a month, and much more will be known, particularly about financial conditions (as opposed to economic conditions), a month from now. Today's relief rally doesn't mean a whole lot, but if the markets — particularly the short-term paper markets — remain stable for the next week or two, normal principles that monetary policy is effective over periods of quarters and years rather than months come into force.
I'm going to quibble with the term "bail out" a bit, too. "Bail out", to me, suggests something more focussed and more dramatic than generally causing interest rates to ease slightly. I worry about long-term inefficiencies created by artificially preventing weak entities from going out of business. Creating a firebreak in the midst of a general credit crunch that threatens a lot of solvent but illiquid institutions, especially in the service of preventing general economic collapse, is fine with me. Few companies that deserved to go under will be spared by these actions.