Thoughts on the Fed’s rate cut - amount not seen since 1984
By Laura Alspaugh, CFA | January 22, 2008
The Fed has cut interest rates in a dramatic fashion to head off a recession. Over the weekend, foreign markets dropped dramatically in a reaction to Bush’s proposed plan to boost the sagging economy. This set the stage for a major selloff today in the US markets. And in steps the Fed, prior to the market opening this morning, and cuts rates by 75 basis points.
Does it feel like the ’hair of the dog that bit you’? We got into this mess with easy credit and low rates with the home and credit card as the cash machines to support the consumption. There is a notion that more and more spending will avoid a recession. That is probably true, however, sustainable growth needs more than just a shot in the arm to the consumer. The U.S. cannot have a growing economy with a large debt hangover in our homes and in our government. There is the short term and there is the long term. Unfortunately, we seem to manage only to the short term.
Let’s hope this juggling act of boosting the economy while keeping inflation under control does not produce longer term undesirable consequences.
Flashback to WIN
The 1970’s was a period when higher energy prices led to inflation but also recession was in the waters too. At that time, the Fed’s focus was to prevent a recession and meanwhile, inflationary pressures continued. While inflation continued to be a problem, unemployment was rising to levels above 10%. Inflation was so bad, President Ford crafted a whole grassroots campaign with WIN buttons: ”Whip Inflation Now”. There is a button for sale on eBay for $3.99 (not including shipping costs). Assuming the lucky seller bought it in 1974 for a dime and he sells it today, he will have really whipped inflation with an estimated 11.5% annualized rate of return over the past 34 years!
Topics: Markets, The Economy |