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How Low Will the Fed Go?

Chairman Bernanke is hearing it from all sides, but the rate doves appear to have the upper hand

As Federal Reserve Chairman Ben S. Bernanke and company consider how far to cut interest rates, they are getting harangued from all sides. Slash rates drastically to keep the financial system from freezing up, say some backseat drivers. No, say others, there's no sign yet the economy as a whole is in enough trouble to warrant deeper cuts.

The discussion over what to do next is tied to a different debate about whether the Fed made a mistake and cut rates too far in 2003 and 2004. Back then, under former Chairman Alan Greenspan, the Fed dropped the fed funds rate—the main short-term interest rate it controls—as low as 1%. In doing so, it staved off the economic collapse many economists feared after the tech bust and stock market decline. However, critics charge that the amount of money the Fed pumped out was so large it led to harmful speculation in the housing market. Morgan Stanley (MS) economist Stephen Roach says the Fed became a "serial bubble blower."