In the wake of the Bear Stearns collapse: US Federal Reserve cuts interest rates again

WSWS reports: As the dollar falls, foreign investors suffer losses on the money they invest in the US to finance the US' current account deficit. Carlos Asilis of Glovista Investments told the Wall Street Journal, "The whole world is focused on the financial crisis and the US is really the epicenter of the tension. As a result, we're seeing capital flow out of the US."

The Wall Street Journal commented: "That is a troubling prospect for a savings-short, debt-heavy economy that relies on $2 billion a day from abroad. [...] But while foreign cash continues to pour into the US from abroad, this flow has been slowing. In 2007, foreigners' net acquisitions of long-term bonds and stocks in the US was $596 billion, down from $722 billion in 2006, according to Treasury Department data."

According to a new US Treasury Department report, January inflows dropped to $37.4 billion from $72.7 billion in December—not enough to cover the $58.2 billion trade deficit.

Such concerns explain why the 0.75 percent rate cut was controversial in the Federal Reserve's policy-making Federal Open Market Committee. Two of the ten members—Richard W. Fisher of the Federal Reserve Bank of Dallas and Charles I. Plosser of the Federal Reserve Bank of Philadelphia—voted against the action, specifying they would have preferred a smaller rate cut.

Economic data reported Monday and Tuesday pointed to the growing impact within the broader economy of the financial turmoil shaking Wall Street.

A Federal Report reserve released Monday showed an unexpectedly steep decline of 0.5 percent in February US manufacturing activity. US retail sales fell 0.6 percent, led by falls in consumers' purchases of furniture, appliances, and automobiles. Car production fell 1 percent, and utilities production fell 3.7 percent.

Housing starts fell 0.6 percent in February, according to US Commerce Department data. Building permit activity, a sign of future construction plans, fell 7.8 percent to a rate of 978,000 units per year, the slowest since September 1991.

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