Economics & Research Blog
Please, Not Another Rate Cut
The Fed is meeting today and tomorrow,
By Dr. Joe Webb
Published: October 30, 2007
The Fed is meeting today and tomorrow, and markets are anticipating a quarter-point rate cut. We don't need any more. Among recent complaints is that the dollar is getting weaker and weaker. Of course it is... the supply of dollars in relation to other currencies is too big. Since so many dollars are sitting overseas, waiting to be repatriated in the form of purchases of goods and services or direct investment in the U.S., lower interest rates mean that those dollars, essentially out of the short-term control of the Fed, lose their value. Unless the Fed can get other major countries or EuroLand to lower their rates, this will just make the situation worse. Remember, recent oil price increases are not being felt in non-U.S. currencies.
There have been some rumblings that protectionist talk is also sending the dollar down. Of course it would, because it decreases the demand for dollars, putting further downward pressure on it.
Also, recent tax policy discussions around the removal of the Alternative Minimum Tax and replacing it with a rather punitive tax surcharge will send long-term investment downward. In a global economy, the best places to invest are no longer North America, Europe, or Japan. Opportunities are all over the world, and retrograde tax policy can no longer have the safety net of a lack of investment alternatives.
If the Fed eases again, the euphoria may be what financiers and businesses want. But the hangover will be borne by consumers in lower real wages and higher prices. While stagflation is not likely, a rate cut may perversely plant the seed of recession-like conditions.