Why The Fed's Panicky Rate Cut Won't Save The US Economy

Why The Fed's Panicky Rate Cut Won't Save The US Economy

We suspect that the cuts won't work.

by John Stepek

Don't panic. It's the number one rule in a crisis.

http://www.moneyweek.com/file/41015/why-the-feds-panicky-rate-cut-wont-save-the-us-economy.html

But it seems that the people who run the global economy didn't read

that particular rule book.

Seeing stock markets plummet across the world in the past two days,

Ben Bernanke and his compatriots at the Federal Reserve - arguably the

world's most powerful central bank - have today slashed US interest

rates by a full three-quarters of a point (that's 750 basis points, if

you want to get technical about it), to 3.5%.

Here's what the Fed said to justify the cut: "The Federal Open Market

Committee has decided to lower its target for the federal funds rate

75 basis points to 3 1/2 per cent. The Committee took this action in view

of a weakening of the economic outlook and increasing downside risks

to growth. While strains in short-term funding markets have eased

somewhat, broader financial market conditions have continued to

deteriorate and credit has tightened further for some businesses and

households. Moreover, incoming information indicates a deepening of

the housing contraction as well as some softening in labour markets."

In other words, "we think there's a recession coming and in fact it

may already be here." Nothing the stock markets hadn't belatedly

worked out for themselves already, of course.

Now received wisdom suggests that changes in interest rates don't take

effect immediately. In fact, most people think they take about 12 to

18 months to kick in. The Fed had just eight days to go until its next

official interest-rate setting meeting on January 30th. Now perhaps

I'm wrong, but in the context of a year, I don't think eight days

would have made that much difference.

So what's the Fed trying to do? Well, the answer seems pretty

straightforward. This is a huge, drastic move - make no mistake about

that. US interest rates have not been cut by this much in one go in

more than 20 years. Bernanke is trying to make sure that everyone on

Wall Street knows that he will do whatever it takes to keep share

prices afloat. Particularly during an election year. And if that means

destroying the dollar, or igniting inflation, then so be it. They

don't call him 'Helicopter' Ben for nothing.

So what does it mean for your investments? Well, it's going to be

interesting to see what happens to US stocks today. After all, the Fed

has just unleashed a volley of shots from its 'interest-rate gun'. If

the cuts don't work, there aren't that many shots left. And if you

look at headline inflation, US real rates are now already in negative

territory (in December, the consumer price index was up 4.1% on the

year - and even the core reading, which excludes food and energy cost,

rose at an annual rate of 2.4%). That means that savers will almost

certainly soon be losing money by keeping it in the bank. If that

doesn't force consumers to spend, then there's not a lot else the Fed

can do.

We suspect that the cuts won't work. Sentiment has turned and people

and companies are now focused on rebuilding their balance sheets.

Looser lending conditions will be used to repay debt, not to borrow

more. One way or the other, the US is heading for recession, and rate

cuts now only risk making inflation a real threat.

Of course, it's all good news for gold. Gold has sold off recently,

almost certainly in part due to various players rushing to liquidate

easily sold assets to fund losing positions elsewhere. It looked set

to fall further today, but the Fed's announcement arrested the decline

almost immediately. We suspect it will be back above $900 an ounce

before too long.

"BUSH STATE OF THE UNION - The REAL STORY!"

A lot of posters on alt.impeach.bush and alt.politics.bush are so

Bush-washed that they don't or won't accept that WE'RE ALREADY IN

RECESSION!

I would hope you duped folks aren't waiting for your WHITE HOUSE WAR

CRIMINAL to TELL you OR ADMIT we're in a recession.

It will never happen.

The last thing your Nincompoop-In-Chief wants to ever acknowledge is

that his years in office are circumscribed at each end by MAJOR

DISASTERS.

1) The 9/11 terrorist attacks in 2001.

2) A major recession in 2008 into at least 2009.

Yes, the worst misadministration in U.S. history will be remembered

for its FAILURES, CRIMINALITY, MALFEASANCE, MISFEASANCE, DECEPTION,

and INEPTITUDE -- all "enclosed" between BUSH'S TWO BIG BOOKENDS!

By accentuating and increasing the fall of the dollar, by fueling

inflation, and by decreasing income from safe investments (bonds) the

Fed, in the long run accelerated and accerabated the upcoming

recession.