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Mal Practice?
The Federal Open Market Committee (FOMC) should keep the federal funds rate at 3 percent.
While it is likely cuts in the federal funds rate may encourage growth in GDP from the lackadaisical rate of 2.2% in 2007, it is not certain. A rate cut would spur a brief growth period in the short run where wages are relatively sticky and the aggregate supply curve is flat, but there would then be a trade off. Doing so could raise inflationary expectations and store up problems for the future. Abruptly increasing the money supply just to stimulate a temporary economic boom is typically not advised, due to the fact that eliminating the increased inflationary expectations will be nearly impossible without producing a recession. This goes against the goals of the fed to foster “price stability” and “maximum employment” (Blinder, 1997). I say typically a bad idea because there are periods when the economy is hit by some unexpected external shock (subprime mortgage crisis), and it may be beneficial to offset the macroeconomic effects of the shock with (expansionary) monetary policy.
The problem with the subprime rate crises and the current expansionary policy (cutting the Fed. Funds rate) is that this “antidote” maybe the wrong prescription for the markets ailment (Credit Crunch). The subprime mortgage crisis was an abrupt rise in home foreclosures in late 2006 which became a global financial crisis during 2007 and continues to be a problem today. The crisis began with the bursting of the housing bubble, which led to high default rates on "subprime" and other adjustable rate mortgages (ARM) made to high-risk borrowers with lower incomes than "prime" borrowers. A long-term trend ...