The Federal Reserve and the world’s other central banks face an impossible choice.
On the one hand, they could have tightened the money supply by raising interest rates or other means. That would have risked sending economies near recession into recession–Germany, for example–and slowing growth further in economies that were already seeing signs of slowing growth. For the Federal Reserve, this is a very important part of the calculation–risk a financial market tantrum that revived
fears of a bear market. Tightening the money supply would, on the plus side, have sent a strong message to credit markets that the current degree of risk-taking was over-done and that it was time to pull back on credit to riskier borrowers. In the short, term, unfortunately, that kind of signal to lenders would have added to recessionary forces, even if, in the longer-term, such action might have headed off a deep credit crisis.
On the other hand, these central bankers could have opted to put off interest rate increases and, in the Fed’s case, to dangle the possibility of an early end to balance sheet run-offs of $50 billion per month that had the effect of tightening the money supply. That would have reduced fears of a pending recession–which would have the effect of reducing the likelihood of an actual recession since fears of a recession are a major element in bringing on an actual recession.
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