SA: Stop the Rate Cuts!
by: Zubin Jelveh posted on: April 15, 2008
That's the plea from Harvard's Martin Feldstein, arguing that low rates would help food and energy prices rise even higher:
"Lower interest rates also add to the upward pressure on these commodity prices - by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.
Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.
An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise."
With food riots around the world in countires like Haiti and Egypt, and with already low rates having little impact on borrowing, Feldstein believes even lower rates will exacerbate problems abroad and hurt economic conditions at home.
Feldstein is no hawk -- he was among the most vocal economists calling for the Fed to move fast on cutting rates last year in response to the housing crisis.
But it doesn't look like traders are listening to this argument. Interest rate futures show that the majority of traders expect the Fed to lower rates this month from 2.25 percent to 2 percent:
AI
