Fed Rate Cut

So, the Fed cut rates today. Think it will help? Or will things just keep going south?

Comments

[Matt]

It's just like that commercial: the dam inspectors plug a crack with a piece of gum.

[FMF]

Looks like the market doesn't think much of it -- at least not yet.

[anon]

No, particularly given what they chose to cut. But I have a tough time understanding the logic (unless one worships at the altar of Keynes). We solve a problem of excess and too cheap credit by flooding the market with more credit? And where do we get this credit to flood into the market?

[Lily]

Actually, sitting under the Dow board at work, the market thinks better of the cut now than it did three hours ago.

Ah, Bernanke. He seems to have forgotten everything he wrote in his textbooks. I have to wonder how my college econ professors are reconciling Bernanke's actions with the texts for the current intro Econ students.

[MonkeyMonk]

I think it's going to keep going down, at least for a bit, and as a long-horizon investor with a fair amount of available income I couldn't be happier at the moment. I've been buying a bit more and more every week and the sale prices just keep getting better. :)

[JEM]

If it helps at all it will be a small help and only short term....we are going south for sure.

[Bill]

It will help short-term. As John Maynard Keynes said, "In the long run, we're all dead." When survival is the only thing that matters, short-term actions are the only things to consider.

However, I've been saying for quite some time that the Fed needed to cut rates long ago. The Fed needs to become more active rather than reactive. We all know this latest cut was because of what happened in the overseas markets, not because they think shaving 3/4 of a percent is going to be an economic boon.

If they thought that, they should have started dropping rates as soon as *people* started talking about a tanking economy.

Interesting note: There have been 3 recessions in the last 20 years (if you count what we're in now as a recession). All under a President Bush.

[Jake]

"Interesting note: There have been 3 recessions in the last 20 years (if you count what we're in now as a recession). All under a President Bush."

Not entirely shocking given that "a President Bush" has been running things for more than half that time.

[aaktx]

Can you spell banking bailout. Markets need liquidity to work, lend, and finance. Unfortunately the confluence of high commoditiy prices, rapid growth in developing markets, and a housing bubble exists. If the housing bubble did not occur I would have expected further rate hikes to control inflation. Hopefully our economy becomes export driven to take advantage of the falling dollar.

[Scott]

Interesting thing to note: All 3 recessions have happened while the democrats controlled congress.

[Scott]

Interesting thing to note: All 3 recessions have happened while the democrats controlled congress.

[Scott]

Interesting thing to note: All 3 recessions have happened while the democrats controlled congress.

[Brion]

Oil prices, trade deficits, and a weak dollar = one nasty catch-22.

The continued rate cuts might be the right thing to do right now, but it they work it's going to be a long term fix preceded by short term pain.

Why? The inter-relationship of oil, the US trade deficit and the dollar. (I think it was Jim Jubak of MS who wrote about this subject some year's ago - I'll try to find the reference and include it at the end.)

We've all heard about high OIL PRICES (the result of terrorism, demand from emerging markets, etc).

Now because the US imports so much of the oil it uses, any increase in the price of oil leads to an increase in the TRADE DEFICIT. Generally speaking, a larger trade deficit leads to a WEAKER DOLLAR.

And guess what? Oil is priced in dollars. So, when the dollar falls oil producing countries must raise prices (assuming their currency isn't pegged to the dollar here) in order for their non-dollar-denominated purchasing power to remain the same.

So an increase in the price of oil, leads to an increase in the trade deficit, which leads to a weaker dollar.

You know what else weakens the dollar? INTEREST RATE CUTS by the US Federal Reserve that aren't matched by Federal Reserve Banks' of other countries.

So where does that leave us? Lowering interest rates leads to a weaker dollar, a weaker dollar leads to an increase in the price of oil, which leads to an increase in the trade deficit, and so on... One vicious cycle.

Obviously I'm looking at this leaving out a lot of other variables that come into play, but the ST ramifications of what Bernanke is doing just scares the bejeebers out of me.

I found the original article Jubak wrote (back in 2004 - when price of oil was in the $20's - LOL - wow!)

http://moneycentral.msn.com/content/P100650.asp

[MonkeyMonk]

The interesting thing about the current oil industry is that they really can't afford to charge more than around $100 a barrel. This is the price point when it finally starts to become economically feasible to mine and process shale oil. Who's has the world's largest reserve of shale oil . . . the US . . . which is sitting on a reserve that could dwarf the Middle East in oil production. It's always been too expensive a proposition, but now, not so much.

None of this will happen overnight but you can bet the industries' R&D are in overdrive right now.

[Pauline]

Inflation, inflation, inflation. If a lot people who don't understand the importance of price stability (i.e. most, see commenters above) decide to take advantage of the rate cut then the economy *might* bounce back a bit, then we will have a period of inflation, then recession again... I haven't been following American news too closely (I live overseas) but I wonder if there was any political pressure behind the rate cut. It's the kind of stupid thing that seems to be characteristic of GWB's handling of the economy.