CFR: Fed Rate Cut Reflects Fears of Market Panic

Global stock markets plunged on January 21 and 22, many of them taking their worst losses since 9/11 amid fears of a U.S. recession. The U.S. Federal Reserve responded January 22 by announcing emergency cuts in its benchmark interest rate. Sebastian Mallaby, director of CFR’s Maurice R. Greenberg Center for Geoeconomic Studies, says the move represents the Fed shifting its priorities away from responding to real economic indicators, and focusing instead on an effort to ease short-term panic in the financial markets. Mallaby says the Fed must be careful to mind its core mandate—price stability—at a time when several different factors are creating price pressures that could stir inflation. He adds that the Fed’s move doesn’t immediately mitigate the “crisis of confidence” afflicting international banks, noting the corrosive effect banking problems have had on international stock markets. Mallaby also discusses the politics of U.S. market turmoil, noting that it bolsters Democrats who link the struggling economy to a Republican presidency.