The Bank of Canada (BoC) this morning cut its overnight rate 25 bps to 4.25%. This was in response not to a slowing economy (au contraire) or rising unemployment (it is at a 30+ year low), but rather to a hue and cry of Canada's manufacturing sector and the provincial premiers. The BoC used for cover the idea that future inflation will be lower; present inflation however is still pretty high. Canada was the first to cut rates to prop up exports, but they won't be the last. I don't blame them; Canada is acting in its national self-interest, ostensibly. However, the world, including many Americans, need to stop treating the United States and the rest of the world with a double standard. Let the rest of the world become more competitive rather than relying on the crutch of currency devaluation. Everyone and their brother is touting the success of the Brazilian economy. However, most of these touters either have too short of experience there or have chosen to ignore the fact that Brazil got to this point by devaluing its currency, which was one of the contributing factors to Argentina's bankruptcy. The Brazil real is still significantly weaker versus the US dollar than in was in 1999, even after the big run up this year.
I have said here many times that the risk of lower rates is higher inflation. If the reason for the Fed lowering rates was to prop up exports, I would be vehemently opposed to them. As it is now, I don't think a lower Fed Funds rate is justified, but at least a credible case can be made. Other countries, even those with independent central banks, lower rates all time in order to make exports competitive. My point is that these same countries shouldn't complain when a consequence of lower US rates is stronger US exports. However, no one people are as altruistic as Americans are. Maybe it is time to be more selective in our altruism.
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Americans love double standards, especially if it makes the U.S. the bad guy.
Devaluing currency is an old Latin American trick. As you point out, it can (and usually does) backfire
I agree that the Fed, fundamentally, does not have to ease. However, bank officials are begging for help. You will see writedowns go above $20B from some from some firms.
Today's agreement to freeze subprime adjustable rates is politically and bank drive. I it is unfair to both those who made better borrowing decisions and those who were busting their butts to stay current on their mortgages.
Investors are also screwed. With the stroke of a pen, bondholders rights to their stated coupons were wiped away. There is talk about introducing legislation which will prevent investors from suing banks due because of the freezing of coupons.
This should make all bond investors nervous. No one's coupon is guaranteed if the issuer (borrower) is in deep enough trouble and are deemed important enough.
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