Fed rate cuts futile, says Nobel laureate
Friday, 01 February 2008

Agence France-Presse . Vienna

The recent surprise cut in interest rates by the United States Federal Reserve was pointless, Edmund Phelps, who won the Nobel Prize for Economics in 2006, said in a newspaper interview released in Vienna on Tuesday.

‘In the long term, I don’t see any point in the rate cuts by the US central bank,’ Phelps told the Austrian daily Kurier on its website. ‘Lower interest rates will boost inflation and, with it, unemployment.

The European Central Bank recognises that much better than the Fed,’ Phelps said in comments reproduced in German. Last week, the US Federal Reserve slashed its key Fed funds rate by a whopping three quarters of a percentage point to 3.5 per cent to stem heavy losses on global stock markets.

It was the Fed’s biggest rate cut since the US central bank began using the federal funds rate as a policy tool in the 1990s.

In the wake of the US rate cut, pressure has been increasing on the ECB to follow suit. But ECB president Jean-Claude Trichet dashed hopes for a similar move in the 15-nation eurozone, insisting the ECB’s overriding mandate was to keep a lid on inflation, not actively boost growth and employment.

Phelps was also dismissive of Washington’s multi-billion dollars programme to stimulate the ailing US economy. ‘I don’t like that much, either,’ he said.

‘That won’t have much effect on consumer spending. It’ll only increase the budget deficit and raise future financing costs.’

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