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Fed May Cut Rate to Below Inflation, Risking New Asset Bubbles

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posted on Jan, 29 2008 @ 05:16 AM

Fed May Cut Rate to Below Inflation, Risking New Asset Bubbles

Jan. 29 (Bloomberg) -- The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974.

The threat of cascading stock and home values and a weakening labor market will spur the Fed to cut its benchmark rate by half a percentage point tomorrow, traders and economists forecast. That would bring the rate to 3 percent, approaching one measure of price increases monitored by the Fed.
(visit the link for the full news article)

Related News Links:

posted on Jan, 29 2008 @ 05:16 AM
Expect more weaken dollar in world markets and increased inflation.

Good analisys in Bloomberg:

Negative real rates are "a substantial danger zone to be in,'' said Marvin Goodfriend, a former senior policy adviser at the Richmond Fed bank. "The Fed's mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long.''

I bet on both.

Lower interest rates => cheaper money (borrowing) => more spending => higher inflation or/and another bubble

Just look at gold prices in $ and everything is said:
It goes up and up... [from link I left]:

Lower rates could aggravate inflation. Consumers and businesses already are smarting from high energy prices. Dropping rates even more can further weaken the dollar. That could raise the cost of imported goods coming into the United States and lead American companies to raise their prices as foreign-made goods become more expensive.
Low rates, over time, could lead some people to live a lifestyle that they cannot afford.
"You could see a restart to some of the behavior that was so prevalent just a couple of years ago, where borrowers were relying on home equity lines of credit and other inexpensive forms of credit to fund their discretionary spending," said Greg McBride, senior financial analyst at

Short-term adjustable-rate mortgages could become much cheaper than longer term fixed-rate mortgages if the interest rate-cutting campaign continues. Home buyers could flock to the adjustable mortgages without seriously considering whether they could afford their mortgage payments if rates climbed. That is just what happened during the housing market's record-breaking days from 2001 through 2005. Today, record numbers of people have been forced from their homes - clobbered by rising interest rates and weak home values once the boom went bust.
(visit the link for the full news article)

[edit on 29-1-2008 by Vojvoda]

posted on Jan, 29 2008 @ 06:03 AM
That would make it a 1.5% drop in about a weeks time. They had to be hoping that the .75% cut last week would last a tad longer. I have had the feeling that they are just trying to limp us along until bush is out of office, that way the collapse happens on someone elses watch, but now it looks like they are running out of options.

posted on Jan, 29 2008 @ 07:48 AM
Since the tumble from their October highs (100% on the chart below), the major indices are setting-up a classic dislocation ('crash') pattern. They need to sustain a rally here. A break in the Dow below 12000 (big neckline) could result in another 15 - 20% drop. The PPT (includes the Fed on Wednesday), will tie the Dollar to the whipping-post before they'll allow that to happen. This chart illustrates our vulnerability having bounced-off the second low.

posted on Jan, 29 2008 @ 07:59 AM
So, who does the FED expect to borrow money in a recession?

Homeowners and debt ridden consumers?

Institutional investors of publicly held entities, who by law need to turn a profit in a recession?

The whole capitalistic system derives its power from the debtor promising to pay back more than they borrowed.

Why would you borrow money to invest in a sinking market?, to buy an overinflated house? eat?

The FED could lower the interest rate to (- 5%) and it would not correct for inflation!

Every American dollar is pre-inflated by the FED system.

Every dollar dumped into the system makes the system less stable

The FED is not your friend!

posted on Jan, 29 2008 @ 08:15 AM

Originally posted by Karlhungis
That would make it a 1.5% drop in about a weeks time. They had to be hoping that the .75% cut last week would last a tad longer. I have had the feeling that they are just trying to limp us along until bush is out of office, that way the collapse happens on someone elses watch, but now it looks like they are running out of options.

The same thoughts.

Drop would be 1.25%.

Originally posted by NWRHINO
So, who does the FED expect to borrow money in a recession?

Homeowners and debt ridden consumers?

They will offer you cheaper money, so you more borrow to repay old debts and create more by spending. And because you more spend there will be no recession.

posted on Jan, 29 2008 @ 08:58 AM
It's funny, while working today in my service sector job, I was in a position where I was inadvertently forced to overhear a business type in a phone call (It's funny what people will say around you when they think you can't possibly have a brain of any kind in your head)

He was talking about the slowing economy in terms of his business, whatever that was - saying that various places he'd talked to were all laying off people, that their advertising budget was slashed, that the company was going into survival mode - his words not mine. He also followed that with "well this slowdown can't last forever, we'll come out of it soon".

I really wanted to just go over to him and slap some sense into him. Like, "Hi, I know you think that I'm just some brainless idiot simply because of the position I currently hold, but how can you be so dumb? Read the news! Educate yourself! Start worrying!"..

There are so many indicators that this is really truly not going to be an easy ride, and businesses that go into survival mode really don't get that they're as much a part of the problem as anything else.. Do they really think that by cutting their costs by laying off workers doesn't have a massive cumulative effect? If every business in the US lays off 1% of their workforce, for example, do they think that that will ultimately save them money?

No, better stick our heads in the sand and just hope this will all go away.

posted on Jan, 29 2008 @ 09:40 PM
The Fed is rapidly running out of bullets to support the markets. It's almost inconcievable that they would cut .75 one week and then have to cut again the next week. At the current rate of cuts we will be at 0.0 Fed Funds Rate well before november. If you have noticed, it's taking larger and more frequent cuts to support the market. Also despite what the financial media says the FFR has little to nothing to do with rates that banks lend to consumers (in particular the ARMs). The FFR is what member banks lend to each other at, and the discount rate is what banks may borrow from the fed at (with acceptable collateral). Consumer rates are more tied to the 10 and 30 year bonds or LIBOR. Which have not reacted to the rate cuts as anticipated.

The Fed should probably raise rates but if I were betting on it i'd bet that they'll do at least another .25 tomorrow. The market may sell off if it doesn't get at least .50 basis points. Watch the dollar fall if they cut beyond .25. I dunno maybe they think they can inflate their way out of debt.

Also just caught some rumors of a broker down in Oz failing to settle its trades on time. Can anyone say "counter party risk"? I thought you could.

posted on Jan, 29 2008 @ 11:32 PM
First the dollar has stabalized lately (last two months) so it's future is not pre-determined just because of rate cuts, this is the world reserve currency, and political maneuvers by foreign governement's will likely decide it's fate i.e other central banks cutting rates or not, country's keeping dollar pegs (OPEC), etc.

Also lower rates means cheaper borrowing,(banks will borrow money to try to recapitalize themselves, but who would banks want to lend that money out to , when they fear borrowers defaulting? sorry not happening
Also if the bond insurers's get downgraded the banks will need lots of $ to inject just to keep them afloat (granted the gov't would probably secretly or publically bail them out) or the fed for that matter, but they would not be doing much lending here either. The problem is all the reckless speculating these banks did in structured financial vehicles that only seemed brilliant when house prices were climbing and homeowners were paying. now their game is up(at keast for awhile) , and the fed is cutting to make the downturn orderly. Also the banks are taking advantage of Fed auctions.

There also can be deflating Asset bubble's while "smaller" (in total mkt size) asset bubbles grow, like in clean technology.

[edit on 30-1-2008 by cpdaman]

posted on Feb, 1 2008 @ 03:10 AM
I see nobody opened thread about FED cut. Let continue here.

Fed delivers 50-point rate cut

The Federal Reserve on Wednesday cut interest rates by another 50 basis points and signalled that the door was open to further reductions in an aggressive move to combat the risk of a US recession.

The dollar meanwhile fell to a record low against the euro before closing slightly higher.

The 50 basis point reduction in the Federal Funds rate came hot on the heels of last week’s emergency 75 basis point cut. The combined 125 basis point reduction represents the most abrupt easing of monetary policy by the US central bank since the early 1980s.

How US $ is going down compared to Euro:

Fed cuts US interest rates to 3%


Some observers criticised the Fed for bowing to the short-term priorities of financial markets.

"The Fed looks foolish. It seems they're afraid of the market," said David Greenwald, a partner at Scalene Capital Management.

"Everyone knows that it takes a while for 75 basis points to get through the economy and by cutting 50 now, I just think they're not leaving much room in the future."

I would add that FED is doing everything what they can to save commercial banks.

And the best from Guardian:
Fed cuts interest rates by half a point

The 0.6% figure meant that the US economy grew by 2.2% in 2007 as a whole - the weakest expansion seen since the 1.6% growth recorded in 2002, when the economy was affected by the collapse and the aftermath of the September 2001 terrorist attacks.
Spending on new-home building dropped at an annual rate of 23.9% in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5% in the third quarter. Over the course of the full year, residential spending fell 16.9%, the worst annual performance since the deep decline of 1982, when double-digit interest rates were used to bring down inflation.

The figures suggested the US may be suffering from a mild dose of stagflation - weakening activity plus higher inflation.

A gauge of prices favoured by the Fed - personal consumption spending excluding food and energy items - gained at a 2.7% annual rate in the fourth quarter. That was well ahead of the third quarter's 2% increase and Wall Street expectations. It was the biggest increase for any three months in one-and-a-half years.

Alan Greenspan, the former chairman of the Fed, said today that the chances of a US recession were greater than 50-50. The technical definition of a recession is two consecutive quarters of contraction. Many analysts think the US is already in a recession.

Did article mention stagflation!?

Inflation Rate Is Worst in 17 Years

posted on Feb, 1 2008 @ 07:13 AM
We need to know just what is the actual rate of 'Inflation'

a 'guess'-timate but probably accurate rate of real inflation is near 4.1 %

however the expansion of money (inflation) is kept secret but is near 16%

so... the prime rate has for the past +5 or more years been below the
rate of inflation,
could this factor & realization by borrowers, been part of the reason for
the creation of the housing bubble, and the accomodating banks as lenders
to buyers with no-income-no-job-no-savings ?

Japan has been on a 0% rate for +decade now...
and they have created the condition for the birth & on-going life of the 'Yen Carry Trade',
Is this America's future too?

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