Price stability has always been an important goal of Western central banks around the world. Only until very recently have most central banks been quite hawkish on inflation and rightly so. Now, however, the threat of inflation remains, but there is the added risk of asset deflation, which is very real. This means that central banks have room to cut interest rates without the worry of stoking inflation too much.
Coordinated interest-rate cuts are just what the current market environment needs, not only to make credit more affordable, but also to send another signal to the marketplace that policy makers are doing something for individuals and not just a select few on Wall Street.
Bill Gross, the West coast manager of the world’s largest bond fund, is calling for such a move and he does have a track record of advocating for what’s best for the economy, not just his fund.
I’d like to see an interest-rate cut with the flexibility for more. I do think, however, that there is a limit to how far the Federal Reserve should move. The central bank needs some breathing room on interest rates to handle both asset deflation and raw material inflation going forward.
It’s going to be shaky over the very near term, but I do think we’re going to get a period of consolidation very soon. The stock market is oversold and every piece of bad news you can think of is already factored into the market.
I really think we can avoid what some are saying might be a depression over the next several years. No sector of the economy is going to be booming without the return of the consumer and without the return of the housing market.