May 29, 2008
Absurdity of Current Monetary Policy
In the news yesterday, as I was watching the forex market, I kept hearing that the dollar is strengthening because the bond market is anticipating an interest rate increase from the Fed. The economy is now, apparently, heating up enough that the Fed may want to reign in inflationary pressures by increasing the Federal Funds Rate. From my perspective this is hysterical.
On average, an interest rate cut does not really start to trickle down into the economy for 3-6 months. I want to point out that I understand that mortgage rates move as soon as they anticipate a Fed rate cut or Fed rate increase but you don't see additional home sales for a few months from that time period, so the argument stands that it does in fact take a few months to be felt in the economy.
That said, let's assume that the last rate cut, which occurred in March, takes only 3 months to start to be felt in the economy. Three months from the beginning of March puts us into the beginning of June. When is the Fed supposed to meet again and potentially do these interest rate hikes to curb inflation? Yes that is correct in JUNE. So am I to understand that they dropped interest rates in March because the economy is slowing and "slow growth" is a larger threat than inflation, and are now worried, before the effect of those cuts can ever be felt, that "inflation" is a greater threat than "slow growth"?
Who are these guys kidding? They shouldn't have cut interest rates to bail the banks out in the first place. Of course we are going to have inflation with oil at $129.00 a barrel and food prices soaring. All cutting the rates did was further devalue the dollar and put that much more pressure on oil, thus imports, exports, food, and thus the overall economy. The modest gains we have made in exports, from a weaker dollar are hampered by inflation, considering goods brought in from Asian countries are costing us on average 14.5% more this year than last. Again, oil is to blame. Yesterday DuPont announced an increase in products they supply to manufacturers of 15 to 20%, again oil is to blame.
My point is, if the Fed had it right in march why don't they let their cuts take effect before they begin their "inflationary speak". On the other hand I'm glad they are coming to a reality and realizing that in the current climate inflation is what kills the golden goose not a lack of growth. I just hope that they now start to follow a specific plan instead of running around like a bunch of political chickens with their heads cut off trying to appease people. Inflation fighting, as evidenced from history, is not a hero's work, it is an economists gloomy reality.