Cutting Interests Rates won't Stave off Recession.

The Federal Reserve under Chairman Ben Bernanke show signs that they might slash interests rates further in order to stave off recession. At a Senate Banking Committee session, he told the Senate that inflation will come down shortly and that cutting the interest rates will help prevent a recession from occurring. The economic slow down has been widely blamed on the mortgage crisis that appears far from abating. Reducing the interest rates will increase the supply of money in the economy and make loans cheaper, which in theory, could encourage job growth and increase consumer spending. IHT

The negative effect of lowering the rate is that it can lead to inflation. Inflation rate has reached the 7% margin making it the largest increase in inflation since 1982. Its been cause by the rise in demand in food, high oil prices, biofuel craze, etc. The weakness in the US dollar is another reason why the prices of consumer goods are more expensive. The dollar is down a $1.52 against the Euro. The dollar's buying power is lessening making the price of oil rise above $100 a barrel. This measure will not stop the dollar from depreciating, in fact it will most likely continue to depreciate. This means that American consumers will have to expect to may more. An increase in inflation is not going to help consumer confidence, which is a pivotal in stimulating the economy.

The Fed slashed interest rates to get us out of the 2001 recession and for the most part it succeeded, although it did lead us to the present mortgage crisis. Inflation was increasing during this time but it did not accelerate or threaten economic growth. The dollar was depreciating but not in the levels we have seen in the passed six months. The low interest rates at the time encouraged people to buy homes and banks handed out loans to consumers who in reality could not afford them. Credit card debt has also risen but credit card interests rates are not affected by the Fed's cuts. These cuts in rates may increase American's debt and not help them out of it.

Its quite a risk to cut rates with the rise in inflation. People may have to choose between foreclosure or bread on the table. It is only going to hurt our wallets and damage the economy further . Cutting interests rates is not the remedy to stave off recession. It may only worsen it.