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2007 Business Review -- Federal Reserve

The Federal Reserve acted strangely in 2007. Some might argue precipitously or perhaps even recklessly.

In the wake of a two-year period in which the Fed raised short-term rates too far, too fast, the Central Bank this year sprinted in the opposite direction.

On Tuesday the Fed cut the fed funds rate 1/4 point. That follows a 1/4 point drop at its prior meeting and a sizeable 1/2 point drop the meeting beforehand. The fed funds rate is the interest rate banks charge each other for overnight loans. A few months ago the Fed took the highly-unusual step of cutting its discount rate; on Tuesday the Fed repeated itself on that front. The discount rate is the interest rate the Fed charges banks for direct loans from the gov't.

The end result of all this action, predictably, is that the Fed has painted itself into a corner.

If inflation were to spike Bernanke & Co. would face a Hobson's choice: slowing the economy down to a crawl with renewed rate hikes or slowing the economy down on the reverse side by not responding to price pressures. The Fed also set the dangerous precedent of having given the *appearance* of being swayed by Wall St. traders and by negative headlines from the Pravda-esque media.

Fortunately, however, worker productivity remains at such high levels that a spike in inflation is very unlikely. The economy should be able to absorb without too much difficulty not only the 2004-2006 rate hikes but also the massive doses of liquidity in 2007. In other words it looks as though the Fed will succeed in its mission -- somewhat if not mostly in spite of itself.


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Comments (4)

Now is the time to jump in ... (Below threshold)
nogo war:

Now is the time to jump in to the Market.
Everything is only going to go UP!
If we cannot trust the Fed...who can we trust?

I predicted to my husband y... (Below threshold)
COgirl:

I predicted to my husband yesterday that the Fed would only lower the rate by 1/4% and that the market wouldn't like it.

It's a great time to invest in the market, don't you think?

All this rate drop did was ... (Below threshold)
Drew:

All this rate drop did was show how bad Bernanke's decision to drop the rate a few months ago was. The previous rate drop showed that Bernanke was playing to the Wall Street crowds. They rewarded him with a futile October rally that really had no backing if you look at the earnings reports that were released in the last quarter.

This latest rate drop? Markets falls again because he didn't give Wall St. the 1/2 point they wanted. You want this sub-prime mess to sort itself out? The last two rate cuts shouldn't have happened. There is a very long road ahead of us to get through the easy credit bubble that the Fed created for us not so long ago, and rate cuts are only going to keep pulling the scab off of the wound.

The economy has been resiliant despite the fact the the Fed has made these moves, not because of it. Anyone who beleives the CPI numbers needs to get their heads checked because real inflation in the pocketbooks of everyday Americans is much higher than being reported.

My guess? Latteral move of the markets util next March with the dollar continuing to fall past $1.55. Then a downward trend through August as we see the next rounds of write downs as the Financials try to clear out their books of horrible 3rd Tier numbers. This will also give us time to get through the massive number of forclosures that are about to come due.

Not going to be pretty folks.

Fickle market is up this mo... (Below threshold)
COgirl:

Fickle market is up this morning.




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