Ill-advised move. The U.S. Dollar is still over-valued, yet raising interest rates further props it up (and that makes foreign imports cheaper).
Posted on 11/10/2004 11:16:10 AM PST by RWR8189
In the fourth tightening of US monetary policy in as many meetings, Alan Greenspan and the Federal Open Market Committee (FOMC) raised the Federal Funds Rate target 25 basis points to 2.00%, as expected.
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Ill-advised move. The U.S. Dollar is still over-valued, yet raising interest rates further props it up (and that makes foreign imports cheaper).
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 2 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions have improved. Inflation and longer-term inflation expectations remain well contained.
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Ben S. Bernanke; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Thomas M. Hoenig; Donald L. Kohn; Cathy E. Minehan; Mark W. Olson; Sandra Pianalto; and William Poole.
In a related action, the Board of Governors unanimously approved a 25 basis point increase in the discount rate to 3 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City.
I don't see any good reason for raising rates other than Greenspan needs a reason for being. He admitted (after the fact) it was raising rates w/o real inflation that started the recession of 2001.
They should stay flat for a while IMHO, but Greenspan wouldn't feel like he has a purpose if he did that.
Totally unnecessary.
If we were experiencing inflation there would be a reason for a rate increase(s)... the only real inflation has been due to the price of fuel (which is starting to decline) and if anything IMHO is a reason to keep rates down, not increase them putting further strain on a fuel-driven economy. WHY did the President re-nominate him, anyway. Watching his wife they are no friends of Bush.
"The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal."
Translation - Its anybody's guess.
Either way the dollar itself IS heading lower as we enter into the new cold war.
Maybe for you. But I like to see my savings CD become more than a certificate of depreciation!
Rates are just moving from emergency levels to more normal levels.
The FFR at 2% is still extremely low by historical standards.
How do you figure the dollar is overvalued? The last two weak dollar policy periods ended in disaster. The first was the Carter administration and the other was the second term of the Reagan administration, which ended in the crash of 1987.
The market's correction mechanism for trade imbalances is currency devaluation. If a trade imbalance persists, the currency hasn't been devalued enough.
So to answer your question, I figure that the Dollar is still overvalued because our trade imbalance hasn't materially shrunk.
If there is a significant time lag in that indacator there could be problems. I think the high price of oil has also delayed any effect. Since all oil is priced in dollars and we import more of it than ever before, that complicates matters.
I think focusing on imports and exports as an economic indicator is just asking for disaster, although it's popular with politicians all over the world. I have two theories. One is exports are seen as a sign of virility, like penis size, even though they only make up a small fraction of the economy. The other is currency manipulation is one of those areas where governments can easily do manipulation and get away with it.
save
Amen. It's time to put the brakes on consumer debt for awhile and reward those who save.
Rates are being hiked to provide a cushion in case we get hit again.
The dollar has been weakening for months. If rates aren't raised it will continue to lose value. Great if you loved the inflationary Carter years, I suppose. If anything Greenspan has been guilty of adding fuel to financial bubbles for several years with his loose credit policy. The housing/mortgage bubble will be next to explode, a situation made far worse by too many years of cheap credit.
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