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I don’t quite understand the strong reactions to yesterday’s move by the Federal Reserve. To me, it seems perfectly reasonable for the Fed to cut rates by 50 points.

I’ll put the easiest way I can. The Fed last raised rates in June 2006. From June 2006 to August 2007, the year-over-year core CPI has fallen from 2.64% to 2.13% (the data just came out). That’s 51 basis points. In other words, the Fed is just keeping up with inflation. If you keep rates the same while inflation goes down, you’re really tightening.

You can skip all the mumbo-jumbo about commodities and gold and M2 and simply look at real interest rates (meaning after inflation). During a recession, the Fed Funds rate should exactly match the core CPI. During an expansion, it should be about 3% higher.

Here’s a look at recent history:

Posted by edelfenbein at September 19, 2007 8:53 AM