Trimming Expectations To Spur a Rate Cut

by Colin Gustafson
Tue, 19 Feb 2008 at 9:48 AM

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The chairman of the Federal Reserve, Ben Bernanke, is all but certain to slash interest rates again, this time to as low as 2%, but only after market participants have tempered their expectations, an economist at the University of Oregon, Tim Duy, writes (Economist's View

Defying some investors' predictions last week, Mr. Bernanke stopped short of lowering the Fed Funds rate yet again, while leaving open the possibility of further rate cuts in the future. The move signals that Mr. Bernanke, while committed to implementing another cut, first wants market participants to brace for a "sluggish" economy and incorporate a somber outlook into their own nearterm market forecasts, Mr. Duy writes.

This will result in a greater impact for the interest rate cuts when Mr. Bernanke implements them.

After two previous rate cuts in January failed to buoy markets for more than a few days, Mr. Bernanke's credibility took a blow, Mr. Duy writes. And with mortgage market problems proving more intractable, Mr. Bernanke is trying to "reassert control over expectations" before resorting to another cut.

"The Fed," a fellow economics professor, Mark Thoma, writes, "is looking for some level land where they can pitch a tent, rest up for a while, and assess the economic geography before setting out again in one direction or another."

USING MARKET FORCES TO CONTROL GUNS A week after a gunman killed five Illinois college students before killing himself, economist Gary Becker argues that steep prices and harsher penalties, not tighter gun controls, are the only surefire deterrent to further gun violence.

The University of Chicago professor writes (Becker-Posner blog) that current gun controls fail to keep firearms out of the hands of criminals and the emotionally troubled, instead driving them to obtain guns on the illegal market. So rather than tightening the requirements for buying legal firearms, lawmakers should squelch consumer demand by implementing steep sales taxes on legal guns while meting out longer prison terms for those caught trafficking them illegally.

"Like the tax on gasoline, cigarettes, and some other goods," Mr. Becker argues, "a gun tax should be several hundred percent of the untaxed price to discourage purchases. What's more, a sizable punishment to illegal suppliers would raise the price of guns in the illegal market in order to compensate sellers for the risks of punishment."

As a result, fewer criminals would try to obtain guns illegally, Mr. Becker writes, and fewer lawabiding citizens would feel the need to pay higher prices for guns in order to protect themselves from criminals. "The demand for guns would be reduced in both markets," he writes.

	FLAT-RATE INCOME TAX A new research paper published by the National Bureau of Economic Research and cited by the Carpe Diem blog argues that Russia's implementation of a flat-rate income tax system in 2001 caused a sharp decline in tax evasion while spurring increased tax revenues. (Credit: National Bureau of Economic Research)