Soros accuses Fed of panic rate cut

Soros accuses Fed of panic rate cut

By Chris Giles, Economics Editor, in Davos

Published: January 23 2008 13:07 | Last updated: January 23 2008 21:42

Reaction to the US Federal Reserve’s 0.75 percentage point cut in interest rates ranged from the hostile to lukewarm as policymakers, businessmen and economists chewed over the move at the World Economic Forum.

In one Davos session almost 60 per cent of the ?delegates voted in favour of a motion saying central banks had lost both their focus and control with respect to ?economic governance. In another, business leaders listed economic mismanagement as one of the biggest threats to the world economy.

Speaking to FT.com’s View from the Top, George Soros, the head of his own hedge fund, accused the Fed of cutting rates in a “rather panicky way...because people fear there are hidden problems” which had yet to surface.

“Then there is worry about the monoline [insurers] and there may be another problem with money market funds,” he said.

The response was not entirely negative. John Snow, former US Treasury secretary, and Angel Gurri'a, secretary-general of the Organisation for Economic Co-operation and Development, supported the move.

“This gives credibility to the fiscal package [of tax cuts] in the US and covers the short term while households wait for their cheques,” Mr Gurri'a said after a Davos session.

Fred Bergsten, the director of the Washington-based Peterson Institute for International Economics, supported the Fed’s actions, but told the FT that, since he expected the US economy to recover later in the year, “the Fed may have to reverse its actions”.

But those offering praise were in the minority. Echoing comments on Tuesday from Mervyn King, the Bank of England governor, Edmund Phelps, the Nobel prize-winning economist from Columbia University, told the FT he was sceptical of policies that tried to avoid a necessary workout of private sector problems.

“I worry over the call of politicians to ‘prevent a recession’ as if interest rate cuts by the Fed and tax rebates could combat or undo the structural forces unleashed by the weakness in the banking sector,” he said.

Two general criticisms emerged. First, that the timing of the move -- just a week before a regular meeting of the Federal open markets committee -- suggested panic and attempted to offer too much succour to equity markets. And second, that the policy would not work.

Writing in his FT.com blog, Sir Howard Davies, director of the London School of Economics and a former chairman of the UK financial regulator, said the move reminded him of the character Corporal Jones in the long-running UK sitcom Dad’s Army, who always shouted “Don’t panic” as he and everyone else were doing just that.

Stephen Roach, of Morgan Stanley, said such attempted market friendly action was the wrong way to run a central bank. “The next meeting is in seven days. What’s the difference if they move [on Tuesday] or in seven days?”

Nouriel Roubini of New York University, a bear on the US and global economy, agreed and called for a more symmetric approach from the Fed. “There was a Greenspan put and now there is a Bernanke put,” he said, in reference to the perception that the Fed chairman always cuts interest rates when investors lose money.

But the more worrying suggestion by many was that the action might not be sufficiently effective to head-off a US recession.Joe Stiglitz, a Nobel prize-winning economist at Columbia University, said the Fed’s action was “too late” and, with structural forces in the US housing and financial systems likely to bring a contraction, would be as effective as “pushing on a piece of string”.