KNOXVILLE, Tenn. — The Federal Reserve’s decision to add money to the nation’s banking system is likely to be viewed by many people as a political decision to help President Bush’s reelection campaign, a University of Tennessee economist said Friday.
Dr. Matt Murray of UT-Knoxville’s Center for Business and Economic Research said the Fed’s action Thursday comes at a time when the nation’s economy is showing some signs of recovery.
By pumping more money into the banking system, Murray said, the Fed will be encouraging banks to cut interest rates further and make more loans available to consumers.
”Analysts are going to be a bit critical of this most recent Fed action,” Murray said.
”Months and months ago people were clamoring for the Fed to do something, and the Fed was absolutely resistant to do that — pointing to how well the economy was performing, when the economy in fact was contracting,” he said.
”Now, although they’re weak, we’re seeing some signs of economic growth, and the Fed is responding very late in the game by moving to lower interest rates.
”I think many people are going to be very cynical about this most recent move and interpret it as a politically-motivated effort to help George Bush’s chances.”
The Fed last eased credit conditions in December when it pushed the funds rate, which banks charge each other, down to 4 percent and slashed the discount rate it charges commercial banks to a 27-year low of 3.5 percent.
Murray said the Fed’s latest move is likely intended to push the funds rate from the current 4 percent to 3.75 percent.