Question: Do you agree, [is] the Fed ahead of the curve? A lot of people have been criticizing it for being slow to respond to the credit crunch, for instance.
Answer: No, I think the Fed was, up until today at least, quite far behind the curve. They had not recognized the severity of this credit crisis.
First, they thought it would be confined to the subprime area of the mortgage market. It has since spread from the mortgage market to credit cards and auto loans. It has hurt the economy much more than the Fed I think originally thought.
So I think today’s action, being extremely urgent on the part of the Fed, was an effort to catch up with the curve, to recognize how severe this credit crisis is, how severe the increase in the cost of credit is to households and businesses, and the danger that that might push the economy into recession.
The Fed never uses the word “recession,” but, indeed, we could already be in one.