The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.
Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.
The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.
I’m holding out for another 175 basis points drop – when they pay me to start taking money, then I’ll claim it.
🙁
This is not good.
This is just more evidence that they are making the currency worthless. Get ready for hyperinflation. I do not believe that it is possible to inject a trillion dollars into the economy [read: print money out of thin air] in such a short period of time without causing massive inflation.
Lowering the interest rate will only exacerbate the problem…which is one of confidence, not of a lack of cash. Banks have lots of cash. What they don’t have is confidence. We got out of stagflation in the 1970’s by [i]raising[/i] interest rates. There was pain, but that is what finally ended the misery. I’ll say it again; we need another Paul Volker. I know that is about as popular as a disco ball at a Van Halen concert….but that is the medicine needed.
“Lowering the interest rate will only exacerbate the problem…which is one of confidence, not of a lack of cash”
Lower interest rates will not in themselves boost confidence. Indeed, investors may take this dramatic rate cut as a sign that things were even worse than they had thought. But lower interest rates and an increased money supply will tend to easy illiquidity in the financial system—on of the most acute problems we face right now.
cure a confidence problem. They may help ease a liquidity
Make that “lower interest rates and an increased money supply will tend to EASE illiquidity in the financial system—ONE of the most acute problems we face right now.”
And when inflation and rising interest rates choke off the activity spurred by [i]that[/i] infusion …
Then we’ll just do [i]another[/i] infusion! And then …
who cares what the interest rates are if the banks aren’t lending? I have already heard stories of banks cutting off performing construction loans, etc. they’d give $$ to anyone for a while and now they’ll give it to practically no one.
#2. S & T,
You are right on target with the conventional wisdom, and I am old enough to have seen it happen before. (I was born before WWII.) It could well happen again. But, I wonder if this time is a bit different.
Commodities are heading down. Oil is only 60% what it cost four months ago. Labor is heading down too. As unemployment increases, people will work for less to put food on the table. “Real” prices of many manufactured goods have been dropping. In many areas you can buy a house for what it cost 5 to 10 years ago. Interest rates are not even a third of what they were at the peak. The newly printed trillion dollars amounts to perhaps a 1% increase in money.
This time we may see almost no inflation at all. What forces besides an extra percent of cash do you see driving it?
As the wind gets knocked out of every economy in the world, we may see a big deflation. I see some things our country should be doing that would have a positive effect on the economy, but I do not see a leader steping forward to move them forward. In the meantime, there are no fundamental drivers to get our labor back on the track. Best wishes, — Stan
I care what interest rates are.
If they are high the money market and bond components of my IRA produce good returns. High interest rates also inhibit inflation, which makes good returns even better real returns.
When they are low, the money market and bond components of my IRA do not produce good returns. And the increased inflation fueled by low interest rates convert those poor returns into real losses.
Hopefully we don’t go the way of the Japanese “Bubble Economy” crash and resulting long-term economic depression in Japan that began in the early Nineties. There, the Japanese government dropped the effective government interest rate to 0%, but it still had no effect on the economy. And when you’re at zero you’ve got nowhere left to go in terms of government stimulus.
[blockquote]And when you’re at zero you’ve got nowhere left to go in terms of government stimulus.[/blockquote]
In terms of monetary policy, yes. But there is still fiscal policy: i.e., reduce taxes and/or increase spending.
Incidentally, all the calls to cut government spending at this time are simply the wrong policy under current conditions; government spending should have been cut four or five years ago (and taxes raised) with at least balanced budgets, if not surpluses.
It is always good policy to cut government spending. If people are stretching just to buy their kids frozen burritos, then it makes sense to scale back government expropriation of private wealth.
Dear CanaAnglican,
First, let me say that I admire you for being CANA. God bless you and all that seek to follow the Lord rather than the culture.
You are quite correct in your assertion that “this time is a bit different.” We have roughly about 20% of the manufacturing base that we did in the 1970’s, thanks to NAFT, GATT, and the full court press to globalization. Another significant difference is that we are not in a Cold War. We are indeed in uncharted territory.
The stagflation of the 1970’s [as I recall] was unprecedented, too. It wasn’t supposed to be possible to have inflation and stagnation at the same time.
That being said, I still fall back on basic economics. Printing that much currency will cause the value of money to depreciate…which should eventually show up in the form of higher prices. I am not wishing this outcome, but it seems to be a fundamental of economics.
Oops…NAFTA
#12. S & T,
Thanks for the kind words. Our parish has been beaten on quite a bit, but I doubt the parish has been any happier in the past hundred years. It is an absolutely vibrant time. Our little parish of 125 people is really growing. We have a dozen Bible studies, and have sent out more than 25 missionaries in the last 18 months. One is in India right now, and two go to minister to the Fulani nomads in the sub-Sahara next Monday. Once the Lord told us to move on, we quit double-guessing and navel-gazing and asked “where?” So, life is good.
I wish it were so for our economy. I agree with you there will be stagflation. I think the “stag” part has greater than 90% probability. As for the “flation” part, “in…” may have a 60% probability; but, “de…” may have a 30% chance, too. We really have to be on guard for both possibilities. These times are quite uncertain.
None of us wants to see a major depression, but in the one of ’29, prices fell. Time will tell. Best wishes through it all, — Stan
“Printing that much currency will cause the value of money to depreciate” —S&T;[#12]
The Fed’s action involves no printing of currency. The amount of currency (paper money and coins) outstanding will remain the same: about $780 billion. http://www.federalreserve.gov/releases/h6/current/default.htm
“Who cares what the interest rates are if the banks aren’t lending?”
The lower banks’ cost of funds, the higher the return banks stand to make if they do lend. The prospect of higher returns should, at the margin, encourage more lending.
#16
And therein is the fundamental problem. A central committee of economists can no more determine what the banks’ cost of funds should be than they could the cost of tractor parts in the Soviet Union. Only the market process can set the clearing price for money.