This is the Cato Daily Podcast for Monday, December 3rd, 2007.

I'm Caleb Brown.

Do Federal Reserve Monetary Policy Actions serve to bail out the markets?

And do they raise moral hazard issues if they do?

St. Louis Fed President William Poole says there's no moral hazard because there's no hazard

created, moral, or otherwise.

We spoke before a policy forum on that subject Friday.

What's the reason for the recent reduction in the federal funds rate after six months of fairly strong growth and low inflation?

Well, the FOMC brought the funds rate down at the September meeting and then by 50 basis points and again the end of October by 25 basis points and the reason is the turmoil in the financial markets that has led to increasing problems in housing finance

and some stress for a number of financial firms, especially banks.

So the idea was to ease some of the pressure and help to resume normal market functioning.

What about the risks that it may create for inflation and ever weakening dollar?

Well, we do have to be careful about setting policy at the appropriate level, not overdoing it.

In terms of the impact on the foreign exchanges, I think that's market determined and it is not directly

a target or an objective of Federal Reserve policy.

How does the Fed counter the idea that this was just a straight up bailout of the housing industry?

I think the bailout argument is really misplaced.

It's what my lecture is about this afternoon.

And if the Fed is successful in maintaining price stability and high

employment we have to adjust policy instruments as new information comes and if we are successful in achieving

those objectives, it will produce more stability, more prosperity for everyone.

So I don't think it's targeted to any particular industry at all.

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