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On the verge of another Fed rate cut Update: Interest rate lowered .75 to 2.25 percent

By Michelle Malkin  •  March 18, 2008 12:42 PM

Here we go again:

Wall Street barreled higher Tuesday as investors found relief in better-than-expected results from Lehman Brothers and Goldman Sachs, and anticipated a massive interest rate cut from the Federal Reserve. The Dow Jones industrial average surged more than 250 points.

Investors, while they’ve seen a number of huge advances amid the market’s recent volatility, appeared considerably more upbeat than in the past few days. They’re confident that when the Fed’s meeting lets out at 2:15 p.m. EDT, it will reduce the target federal funds rate by a full point, bringing it to 2 percent.

The central bank has shown it is trying everything in its power to revive the stagnant credit markets and rescue the financial industry from collapse — it already relaxed its lending practices, and has backed JPMorgan Chase & Co.’s buyout of failing investment bank Bear Stearns Cos.

Quarterly results from two rivals of Bear Stearns — Lehman Brothers Inc. and Goldman Sachs Group Inc. — also gave some solace to a market fearful about investment banks weakening further from losing bets on mortgage-backed securities. Both Lehman and Goldman posted quarterly profits that were significantly lower than they were a year ago but higher than analysts predicted. There had been particular concern about Lehman, considered the company most like Bear Stearns, and investors had sold off the company’s stock on Monday. But Tuesday, Lehman shares spiked back up 33 percent, by $10.55 to $42.30. Goldman shares rose 12 percent, by $18.47 to $169.49, while Bear Stearns shares jumped 49 percent, by $2.38 to $7.19.

There’s no telling, however, how the market will react to the Fed’s rate decision. Anything less than a full-point cut could trigger frenetic selling, while anything more could rekindle the feeling that the credit markets and economy are in worse shape than Wall Street thought.

Hans Bader at OpenMarket.org warns of the consequences:

The Federal Reserve is trying to save irresponsible borrowers from themselves by cutting interest rates to ridiculously low levels, even though that will trigger increased inflation rates (which are already rising) and bring back the stagflation that plagued the 1970s.

Amazingly enough, Congress is saying that the Fed’s indulgence towards borrowers is not enough, and liberal Congressmen and Senators want to bail out irresponsible borrowers by blocking foreclosures or writing off mortgage loans that exceed current home value (which most often happens to borrowers who made little or no down payment because they neglected to save any money for a down payment).

Such low interest rates will spark increased inflation, will further weaken the dollar (thus driving up gas prices), and will discourage international investment in America, resulting in lower economic growth and increased unemployment — the very opposite of the Fed’s goal.

International investors are openly disgusted with the Fed’s inflationary easy money policy, which seeks to artificially prop up the economy and keep American unemployment rates (which are low by international and historical standards) from rising by making it easy and cheap to borrow money (even though Americans already borrow more than residents of any other major country, and have shown little penchant for saving) in order to finance spending that is unsustainable over the long run. In the long run, they believe the Fed’s policy will result in increases in both inflation and unemployment.

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