Wall Street pundits are saying the Fed should lower interest rates by a full point at its next meeting. I think such a rash decision would be unwise and the Fed should actually think about keeping interest rates the same or lowering interest rates by a more modest amount, 0.50 at the most.

It seems the Fed has been focusing more on the stock market than the economy. Earlier this year global markets had a huge selloff when the U.S. market was closed for Martin Luther King Jr. Day. The Fed reacted by unexpectedly cutting interest rates by 0.75 percentage points the next day. It was later revealed that the selloff was caused by forced selling by Société Générale as it wound down trades related to its rogue trader Jérôme Kervie. The Fed, which is supposed to be focusing on the economy, overreacted to what the global markets were doing.

Now, with all the turmoil surrounding financial stocks (Bear Sterns in particular), analysts are calling for another huge cut. I think another big cut would be foolish for a couple of reasons and would once again show the Fed is being bullied by what is happening in the stock market. (more…)