Ben Bernanke indicated yesterday that the Fed was prepared to lower interest rates aggressively in response to continuing economic weakness. The European Central Bank decided to hold its overnight rate at 4.0 percent and suggested that the next move might be up. If the Fed keeps lowering and the ECB holds steady or raises it will soon create the opportunity for a profitable carrying trade involving borrowing in dollars and lending in euros. This will lead to further downward pressure on the dollar (good news in my book) and will send part of the Fed's stimulus to Europe, as happened with Japan and the U.S. earlier in the decade. Reporters should be asking about this scenario.
--Dean Baker
