Fed rate cuts may not rate

Shukan Daiyamondo (Diamond Weekly) asked me to interview John Williamson again, this time on his thoughts about the economic turmoil around sub-prime loans. At the time — late August — Williamson was not overly concerned by events, though he was concerned about the Fed cutting the discount rate, especially if it led to a cut in the federal funds (prime) rate, which happened just this week. At the time, he said if the Fed cut the prime rate without signs of real need in the economy “In that case, you’ll see a bailout of the financial sector, and we’ll face inflationary danger in the real economy.”

The interview ran in Japan this past week, just before the Fed cut the prime rate. The reaction to the rate cut suggests that higher inflation is a real possibility because of it. The Fed cut the rate ostensibly on the back of an ugly jobs report for August and some other pessimistic indicators. Still, while I haven’t seen Williamson quoted anywhere, I’m guessing he’s worried that the Fed has again chosen to bail out Wall Street, as it did in the Long-Term Capital Management crisis of 1998. He said that the Fed had overreacted at that time, and helped fuel the stock market bubble that followed. We’ll see if another one inflates.

Here’s the interview with Williamson as I submitted it:
williamson2