Fed Meeting Today

Everyone's favorite group of quasi independent bankers meets today to discuss the probable rate reduction, which would be just another notch in the belt of the Bernanke Fed and its love for the low interest rate.

The Fed believes that inflation is not a worry because the world's economies are so bad, which I also aree in the very short term to be true. If stock markets are losing 70% of their value from last year such as the Shanghai Index, then the loss in wealth tempers inflation concerns because a lot of money is not needed to be printed to cover the new wealth in an economy.

In the long term, however, the story is quite different since there has been an inertia from the last two Fed groups to raise interest rates regardless of inflation. When the markets stabilize and prices run up on commodities again, your dollar will buy much less with a 1% interest rate than a 3% interest rate, etc. Beware the short term fixes for they may hold long term curses.

Fed says rate cuts to stop

Today I noticed a billboard which summed up the state of the economy. It gave a rate on a $100,000 7 year CD, and it was a whopping 3.45%. That means you are having a net loss of purchasing power keeping money in the CD. The only good things to come from such a low interest rate is that you can borrow against it for a low rate to pay off higher interest bills or invest in something. At least the Fed says they are done cutting . Now raising the interest rate slightly is what we need to stop the free fall of the USD.

Bear Stearns, Asian Markets, and the Week Ahead

Late tonight the news sources are reporting that Bear Stearns is having a firesale, with its shares being bought out for $2 a share. Besides the impact on the broader market that one of its key players has fallen in short order, it could bode poorly for many other big financial firms who also leveraged heavily during the housing crisis and then invested their money into mortgage-backed securities.

"This is about credit being overextended, and how bad it is for major
financial
institutions and for individuals. This is why we're probably
heading into a
recession." -- Peter Dunay, chief investment strategist
for New York-based
Meridian Equity Partners.(from the linked article)

Further, the Federal Reserve lowered the Federal funds rate one quarter of a percent to 3.25 percent. This is an emergency cut, with another cut probable at the Tuesday meeting. The results of the cut and firesale of Bearn Stearns so far have been a drop in the Asian markets and rising gold prices. Gold has been over a thousand dollars an ounce for the first time, though still below the inflation adjusted levels seen during the Eighties.

With the declining dollar value, commodities pricing has risen dramatically, which has been seen in gas price rises and a rise in the cost of food. Since the CPI-core rate does not take into account these "volatile factors" exceluded, the media reported CPI rate of inflation is often lower than the real inflation rate felt by consumers. That will be discussed more at a later time, as this is enough to digest for one night.