Posted on 10/31/2007 9:14:30 PM PDT by bruinbirdman
Not so fast. That was the message the US Federal Reserve sent financial markets with its interest-rate decision yesterday. As expected, the US central bank cut its key Fed Funds target rate, the overnight rate at which banks lend to one another, by a quarter of a percentage point, to 4.5 per cent. That followed the Fed’s surprisingly aggressive half-point reduction in September.
The central bank’s decision then, and the tone of its accompanying statement, seemed to signal to markets that the Fed would cut long and deep over the next few months to avert a serious economic crisis. Since that dramatic decision, financial futures prices have begun to reflect a growing confidence among investors that rates will go much lower – probably below 4 per cent – over the next few months. That, in turn, has helped to keep stock prices buoyant despite continuing financial market tensions from the sub-prime crisis and fears over a broader economic slowdown in the teeth of a troubled housing market.
But yesterday, while the Fed delivered another rate cut, the tenor of its statement was quite different, suggesting almost that it was acting reluctantly. Most importantly, the Fed revived the spectre of inflation. After its September meeting, and in the statement following its emergency financial measures in August, the central bank played down inflation risks. After a year in which it had repeatedly given warning that price pressures were a growing threat to the economy, the Fed accepted that the risk from the credit crunch was much greater.
Yesterday the committee inserted strong language on inflation and talked of higher energy prices placing “renewed upward pressure” on prices.
In the past that kind of language has not presaged further interest-rate reductions at coming meetings. Secondly, the committee members signalled that the debate was not about how large the interest rate cut should be, but about whether there should be a cut at all. It became clear yesterday, however, that the Fed’s discussion was different. Unusually, there was a dissenting voice at the meeting – Thomas Hoenig, of the Kansas City Fed. He objected to any rate cut at all.
Does all this mean that the Fed has decided that it has done enough? Not necessarily. All will depend on the economic data in the next month or so, beginning with tomorrow’s crucial employment report for November. So far the United States has avoided a serious slowdown in the wake of its summer of financial strife. If it continues to dodge those financial bullets, the Fed’s renewed caution will look well-placed. But if American consumers really start to retrench as the value of their houses falls, yesterday’s move will surely not be the last.
“...doomed us to upcoming rampant inflation...”
“WE’RE DOOMED!”
Guess you haven’t checked the CPI lately. OK. Sleep well.
“Guess you haven’t checked the CPI lately. OK. Sleep well.”
I check everything and I’m sleeping fine. The inflation will not be that bad and will be temporary. The weak dollar is a short-term situation, the deflationary Euro is Europe’s upcoming problem. The shocker for many will be that deflation is our next large problem, not inflation. It’s 3-4 years away (in the US), and the coming cycle of deflation will last for 10-13 years. The reasons that this will happen are much too complicated to explain here.
I can’t control the FED, the economy, derivatives, hedge funds, real estate or the stock and bond markets. To me these are just pieces of the puzzle to work around. My job which is to figure out where money can be made, whatever the conditions. Even that loony Cramer is right about one thing, there’s always a bull market somewhere. Good luck to you in trying to do the same.
I like that! Lest we forget.
Maybe some money in the bank, in one form or another, is not a bad idea?
yitbos
>> Maybe some money in the bank, in one form or another, is not a bad idea?
Money in the bank — that’s like, sooooo old fashioned, y’know?
(But that’s where I’m at, and where I plan to stay for awhile. Hope it works out.)
inserted strong language on inflation and talked of higher energy prices placing “renewed upward pressure” on prices.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Higher energy prices are the RESULT of government actions which have weakened the dollar, not the CAUSE of inflation.
The Fed made a tough choice between two negatives, a significant fallout from a mortage loan default crisis, or easing that problem by lowering rates which will contribute to rising inflation.
Either way, the ecomony will suffer.
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