Aplus.net Blog

As you may have noticed, we like to keep our eye on the economic world here on the Aplus.Net Blog. The reason is obvious — although online business has its own methods, it still relies on the traditional business models to a certain extent. Loans and financing are still very much a function of the traditional business world. To this end, it’s extremely important to keep one’s eye on the general state of the American economy.

And as this election year rolls on, the state of the economy is becoming more and more of a hot topic. Recent stock market ups and downs have not only roiled U.S indexes but European and Asian markets as well, so the concern transcends American borders.

Which brings us to today’s news: The Federal Reserve has just slashed rates again, this time by a half point. It’s a dramatic cut, even more so because it follows last week’s historic three-quarter point reduction to total a whopping 1.25 cut in just eight days, astounding a lot of economic observers.

But will it help? Speculation abounds (as usual). According to today’s New York Times:

Ben S. Bernanke, the chairman of the Federal Reserve, and other Fed officials are already under fire from two directions. Many analysts on Wall Street complain that the central bank has moved too slowly in response to signs of a faltering economy. They point to a plunge in housing that does not seem to have hit bottom, slowing growth in retail sales and tight credit.

But a significant minority of economists argues that policy makers have let themselves be unnecessarily alarmed by panicky swings in the stock market. If the central bank props up the economy with easy money, they warn, the result will be higher inflation in the future.

Richard DeKaser, chief economist at National City Corporation, a Cleveland bank, is skeptical that the economy is headed for a recession, despite the common assumption that it is. “Few seem to take seriously the prospect that we are not going into a recession,” said Mr. DeKaser, who cites the latest labor market data, showing fewer weekly claims for unemployment benefits and encouraging layoff numbers, which suggest to him that the nation has added a hefty number of jobs in January.

And despite the huge losses and write-offs stemming from subprime mortgages, he added, many business borrowers have yet to face a credit squeeze.

Members of the central bank’s Federal Open Market Committee, which decides interest rates, have shown clear signs of disagreement among themselves.

Fed officials acknowledged earlier this month that they had lowered their forecasts for economic growth this year, even though their previous forecast had already assumed a slowdown in the first half of this year.

… Fed officials acknowledge that psychology and expectations are playing an important role in the financial markets. To the extent that investors remain fearful about credit risks, markets for mortgage-backed securities are likely to remain dysfunctional and banks will be forced to write down even more of their loan portfolios.

But analysts say Mr. Bernanke faces a difficult challenge in trying to manage expectations. On the one hand, they say, the Fed wants to act decisively enough to reassure investors and the public that it will prevent the economy from sinking. On the other hand, they say, Mr. Bernanke does not want to be seen as panicking in response to a plunge in the stock market.

What do you think? Are the rate cuts going to help your business, or is it too little too late? We’d love to hear any comments you may have.