Weak Economy, Markets Drive FOMC to Cut Rates by 50 Basis Points

Thursday, January 31, 2008

Continued hypertension in credit markets and declining growth figures have put the Fed's task as an inflation fighter on the back burner while it tries to stimulate the economy. The Federal Open Market Committee (FOMC) on Wednesday lowered the Fed Funds rate for Federal Reserve Notes (FRN's) by 50 basis points to 3%, bringing the rate to the lowest level since June 2005.
According to the statement,
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
It appears the Fed is even more worried about financial markets where every new day brings 2- to 3-digit loss revelations, and these are billions we are counting these days.

Fed Funds 2001 - 2008
GRAPH: Fed Funds are back to the level last seen in 2005. Chart courtesy of HSH.
I cannot remember when the FOMC did not expect inflation to moderate in the medium term.
"The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."
Most of the FOMC members appear not to be afraid of more rate cuts, should the economy really tank. Only Fed Dallas president Richard Fisher had voted to leave Fed Funds unchanged.
"Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."
My conclusion: We are indeed on the way to rapidly accelerating inflation. The Fed will print whatever Wall Street asks for. The sick patient, burdened with popping asset price bubbles all over, is given more pain killing medicine for its symptoms but treatment of hemorrhaging budgets is neglected as are the bruises from the fights with Arab boys.
This turns into a text (and history) book case on how to destroy an empire.
The Future Will Be Like the Past
Here's your marching route for the future. All severe economic downturns have played out roughly the same way.
All crises were the result of an orgy of monetary expansion and it has never worked trying to print one's way out of problems.
The USA will probably find this out further down the road of a few more trillion in debt. In 1921 one FRN cost 4 German Reichsmarks. In 1924 it was 4.2 billion Reichsmarks.
As always gold will be the beacon of hope. This most reliable inflation indicator jumped $10 to $930 after the FOMC announcement. Silver climbed to a new 28-year high of $16.89.


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