What if the Fed Cut Rates Less Than Expected?

by Florida's #1 Mortgage Planner on March 18, 2008

This is an interesting question.  Many feel that the Fed appeases the markets, sort of like being the market’s call girl.  After, most rate cuts, especially the emergency rate back in January, definitely was designed to appeal to the markets, or at least appeared that way.

But, what has the Fed rate cuts done besides keeping the stock market happy?  Take a look at some of these stats since the Fed started its current rate cut run back on August 17, 2007:

  • The Reuters/Jefferies-CRB Index was up nearly 35% from August 31, 2007 to February 29, 2008 (33.6%)
  • The US Dollar Index has fallen about 13%
  • The S&P 500 is down around 10%

So, what has the Fed rate cuts accomplished?

Well, they likely prevented the S&P 500 from being down even more than 10%, but its moves have killed the dollar and is fueling inflation.  Believe me when I say that traveling abroad is getting extremely expensive with the euro up against $1.60.  (Side note the euros in my wallet are worth more, but I just don’t have enough to effectively hedge right now).

Since oil and other commodities are priced in dollars, the devaluation of the dollar sends these commodities higher as well.  So, as long as the Fed keeps cutting rates, you will feel the effects of their actions in your wallet as you go to the pumps and grocery stores.  In essence, the Fed is punishing those of us who have struggled to save . 

The Fed needs to get some balls and just not cut rates as much as the market is demanding, or even better, stop cutting rates altogether.   This would likely spark a stabilization, if not a rally, of the dollar.  It may even provide stabilization or decreases in commodities, such as oil, and the entire American population can be relieved.

Heck, think of how many Americans wouldn’t face foreclosure in the future if they didn’t have to face higher inflation?  How many would not face foreclosure if gas prices were lower?  Food prices? 

Makes you wonder if the Feds moves may actually increase the problem even further as more and more Americans won’t be able to pay their mortgages because the cost of living went up too much.  What do you think?

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