So The Fed Instituted A 75 Basis Point Cut . . .
By Pejman Yousefzadeh Posted in Economy | federal reserve | Interest rates — Comments (8) / Email this page » / Leave a comment »
And left people like me--who were expecting a hundred point cut--quite surprised. But Wall Street reacted well. In correspondence with Brother blackhedd, my fellow Contributor at RedState, he informs me that contrary to what was widely reported in the news, the 75 basis point cut was not as much of a surprise to traders as we might have been led to believe and that the market was perhaps heartened that the Fed did not believe that a cut of a full percentage point was needed. By keeping the cut to 75 basis points, the Fed left room for itself to fight inflation while at the same time, stimulating economic growth. A larger cut may have evinced panic about market conditions and the last thing the Fed wanted to do was to panic. The market's upward movement was a signal of its admiration.
Fair enough. Brother blackhedd knows much concerning these matters and given the fact that I want to be an optimist, I am more than happy to hope that his optimistic appraisal of the situation is the correct one. But the following from this story:
The two dissenters in Tuesday's decision were Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed, both of whom have been outspokenly hawkish about inflation issues in recent months.
Several analysts said the dissent and the Fed's warning on inflation indicated that policy makers struggled to agree on even the smaller rate reduction.
"I'm disappointed," said Robert V. DiClemente, chief United States economist at Citigroup. "It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."
These are my concerns as well. And one wonders how easily Bernanke will be able to engender another rate cut in the current environment if he has to. Will the other members of the Federal Reserve Board shut down such efforts for fear that they might exacerbate inflationary pressures? I would think that a weakened economy will do a good enough job of that--the precedent of stagflation notwithstanding.
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So The Fed Instituted A 75 Basis Point Cut . . . 8 Comments (0 topical, 8 editorial, 0 hidden) Post a comment »
Bernanke has always said the primary role of the Fed is to control inflation. I just don't see how he's backing it up by dropping rates everytime Wall Street hits a bump. I tend to side with Fisher and Plosser who wanted a smaller reduction. It almost feels like they are feeding the same problem that got us in the mess in the first place.
I hope I'm wrong, but I'm starting to feel it. Gas prices have soared where I'm at and my grocery bills are creeping up. The major airlines have just added $100 on to every business trip I have to take. I'm hoping they aren't overlooking the average guy in order to save some major financial companies who started this mess in the first place.
But the Fed should be raising interest rates, not dropping them. It's basic economics. Massive inflation, here we come.
Don't be surprised if in a month or two, when the liquidity problems are solve, that we see interest rates take a dramatic swing in the opposite direction. The Fed has merely prioritized liquidity over inflation. They will have to address inflation once the liquidity issue is solved. It will take massive 3/4 and full point increases to do so.
Fighting for conservatism one day at a time.
"I'm disappointed," said Robert V. DiClemente, chief United States economist at Citigroup. "It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."
(Emphasis mine.)
Huh? What does he mean, "going to get inflation"?!? He needs to get out more. Given oil, gold, the dollar fade, all commodities running way up.... it's already here, Bob!!!!
Certain professions literally need to get out more. "Economists" are still stuck with notions that are more like the thermodynamics of Carnot steam engines than reality.
If this kind of outdated "Phillips curve" stuff is still driving major decisions.... God help us!!!!
taught that inflation is caused by loose credit (or more specifically increased money supply).
The reality is far more complex as our current crises with a devalued dollar illustrates. Still no credit, not much liquidity and inflation increasing.
The fact that DiClimente would say such a thing shows he has the economic perspective of a freshman. And this guy is advising Citgroup. sheesh.
You just have to laugh at these fools running our government, until you realize, like me, that you voted for them...then you have to cry at your foolishness.
How did the Bush Administration and the near total unregulated financial markets allow this great country to now be second fiddle to Europe. What...you don't know? Europe is now the world's leading economy. A gaggle of socialist countries, burdened by cradle to grave socialist handouts to its people now collectively make more money than we do. China, the world's largest Communist country, has been growing for over a decade at a clip that should make us as the world's leading capitalist country very, very ashamed.
And the best that the Bush administration can do is trot out Paulson to say anything but the "R" word...."We have a sharp downturn in the economy"..."I'm not concerned about labeling where we are at in the economy, I'm more concerned with what we are doing."....to Bush like some marionette on every TV appearence saying, "We are in challening times." and "We anticipated this which is why we are handing out $150 billion dollars of stolen money back to the American people, not to save or pay down debt but to spend, spend, spend, just like I called for in my history making $3 trillion dollar budget."
Don't get me wrong, in theory, free, unfettered, unregulated markets are the best engine for prosperity, just like Kudlow crows incessently about on CNBC. However, there is the assumption that the people involved in that free market will be, for the most part, ethical and moral. However, we are seeing a meltdown in the financial system because there is a near-fatal lack of ethics and morality and prudence in that system from the top Ceo down to the bottom investor.
And what could Bushie have done? Reregulate, increase corporate taxes? NO! But he could have used his bully pulpit like a pastor uses his pulpit to speak to the American people and Wall Street, that as the leader of the free world and the leading capitalist country in the world that he is very concerned that we have lost our way financially, that we need to become very aware of the dirth of ethics in the system and that the Federal Government will not come to anybody's rescue if you continue down this ruinous path. You all called for deregulation....when the Great Reckoning comes, don't expect your government to reregulate and bail you out in an emergency fashion. If Bush had done that a year or two ago, that would have popped the bubble earlier leading to a less calamitous situation than we face now.
But Bush didn't....and now we face recession in 2008, ever increasing inflation in 2009, a housing market that will be depressed until at least 2011 and ever increasing consumer debt as we tapped out all our credit cards and 401k plans just to make ends meet.
And a Democrat run across the board come November. Just like Bush the 1st couldn't admit to the recession of 1991-1992, leading to the first Clinton, get ready for Clinton part 2 in 2008.
The largest IPO in the history of the world was today's VISA IPO.
Why? Because everybody knows that the only way to make money today is off of millions of people's debt.
And that debt and the fees and interest from it, is only going to increase.
Well, you can also make money in Wal-Mart, Big Lots, McDonalds, Coke and Pepsi which own big stakes in many fast food outlets also. That's because we are so tapped out, that we can't afford Macy's, Saks, Ruth's Chris Steakhouse, Red Lobster, Perrier and Dom Perrion.
Oh, yeah, just one, one more thing. Not only is Europe the leading economy in the world and Communist China the leading growing economy in the world but Saudi Arabia who imported all those terrorists who bombed us in 9-11, are buying up our banks, and our technology companies, and our real estate, all the while as they increase the number of mosques and madrassas in this country.
And illegals continue to pour into this nation unfettered only to burden our already broke social services.
So much for Homeland Security as well.
...may not be equal to the task of clearing the complicated nexus of financial and economic problems we face.
Lower interest rates stimulate economic activity by encouraging people to take more risk. (Ordinarily you want to obtain a higher rate of return than you get by simply staying liquid.)
This often works well enough when you're dealing with a cyclical recession. But in this situation, global investors appear to have lost their appetite for nearly any kind of risk.
Making money cheaper will help banks and other institutions repair their shredded balance sheets. But cheaper money won't increase economic output if no one is willing to put it to work.
I hope I'm wrong.