Economics & Research Blog
The Fed is Ready to Make a Real Cut
Chaos hit the markets again yesterday,
By Dr. Joe Webb
Published: August 29, 2007
Chaos hit the markets again yesterday, as minutes from the most recent Fed meeting became public. Their preoccupation with inflation has made them hold rates where they are despite much information to the contrary, and the fact that the bulk of price increases are essentially caused by demand changes outside of the U.S.
Now that the subprime crisis has it, discipline is coming to the markets as the various debt positions unwind and are reallocated with bankers and investors sell good assets to pay for their mistakes. There's bargain hunting in various markets, and insider buying of stocks has had a surge of activity.
Rather than take the chance, the Fed will ease at their next meeting on September 18, with two more meetings before the end of 2007. While it would be great for them to cut a half point and then say they were taking an extended vacation, they'll probably let it trickle out over two meetings at a quarter point each.
The pain in the business capex markets is probably two steps away, but the consumer purchases of durable goods such as cars and housing will be declining and that will worry the Fed considerably. It's not that these inventories won't get sold: they will at unattractive prices to their manufacturers. The combination of a cut in profits and slowing demand six to twelve months from now is something the Fed wants to avoid.
We're still in a slow growth economy, and the Fed doesn't want to rock that boat by making it worse than it already has.