Yeah, maybe, but I don't see it. < GRIN >
Posted on 11/06/2002 11:19:59 AM PST by fm1
WASHINGTON (CBS.MW) - The Federal Reserve cut interest rates Wednesday to try to get the economy humming again.
By cutting the federal funds target rate to 1.25 percent, the Fed hopes to boost consumer and investor confidence and pump more money into an anemic economy.
"Greater uncertainty, in part attributable to heightened geo-political risks, is inhibiting spending, production and employment the Fed said.
The vote for such action was unanimous.
The group said the risks in the economy are now balanced.
It was the first rate cut since December. The Federal Open Market Committee had cut rates 11 times in 2001, bringing the fed funds rate from 6.50 percent to 1.75 percent.
The move was expected on Wall Street. Forecasters were nearly unanimous in their belief that the FOMC would ease monetary policy Wednesday.
Financial markets had fully priced in a 25 basis point cut and were hedging their bets that the cut would be an aggressive 50 basis point cut.
The federal funds rate is the interest rate banks charge each other for overnight loans. The Fed targets this rate by buying or selling Treasurys in the open market. To goose the economy, the Fed adds money to the system. To contract the economy, the Fed takes money out. Read more about monetary policy.
The economy officially entered a recession in March 2001 after months of slipping industrial production and falling stock prices.
The FOMC had held its fire since last December. It is likely that the private-sector National Bureau of Economic Research will eventually determine that the recession ended in December or January -- if the economy doesn't dip back into a recession now.
The NBER said Tuesday that the recession "may have come to an end," but would wait to make its decision.
The FOMC has been warning since August that the main risk to the economy is a relapse, signaling its intention to cut rates again if the economy appears to be worsening. Even before the FOMC changed its official risk assessment, the committee had said the most likely outcome was a tepid recovery, with uncertain growth in consumer spending and capital investment remaining weak for months.
At the Sept. 24 meeting, two of the 12 FOMC members -- Gov. Edward Gramlich and Dallas Fed President Robert McTeer -- voted in favor of an immediate rate cut. It was the first time a Fed governor had dissented in seven years.
The Fed's 11 rate cuts pushed down market interest rates. Automakers offered zero-percent financing on many new cars, which drove sales to record levels. Mortgage rates, too, fell to historic lows, keeping the residential construction and real-estate markets booming.
Throughout the recession, consumers maintained a steady pace of spending, an unusual occurrence in a most unusual business cycle. Consumers' incomes never faltered, due to a timely tax rebate and tax cut and to a relatively low unemployment rate even in the depths of the recession.
But now the evidence shows that consumers have become inured to low rates. Auto sales have fallen back. Retail sales have slowed. Consumer confidence has fallen to nine-year lows, as the bear market and war talk take their toll on consumer psyches.
Some worry that rate cuts wouldn't spur consumer demand because consumers are heavily indebted at the same time they are trying to save more to make up for the pathetic performance of their stock portfolios.
Consumer spending has propped up the economy, which has grown 3 percent in the past year. Growth is uneven, however. In the third quarter, spending on cars accounted for more than half of the 3.1 percent growth rate.
The low interest rates never really benefited businesses. The spread between Treasury yields and corporate bond yields widened, as creditors began asking tough questions about inflated balance sheets.
Companies didn't face a full-fledged credit crunch; neither was there much demand for credit to expand businesses. Companies had to work off their inventories first. Without a pickup in demand, companies had no incentive to invest in new buildings or equipment or to hire workers.
You are speaking metaphorically....Obviously, they don't increase they supply of paper money with presses as this is an insignificant fraction of the money supply.
They lower interest rates making loans less costly so more loans are made...Obviously, if you hit zero interest and prices are still falling there is a problem....
I hear they are considering tweaking the multiplier restriction....That doesn't sound like such a good thing to me...
Yeah, maybe, but I don't see it. < GRIN >
Yes, sometimes that's what you do. And sometimes, that even increases the speed of money (but not always - or even usually).
If inflation increases too severely, however, then people resort to a barter economy (all barter economies are "slow" compared to paper-based currency economies) which slows down the speed of money. Since it isn't convenient to carry around a wheelbarrow full of Duetchmarks for your morning cup of coffee, you either don't go to the coffeeshop (slowing down the speed of money) or else you go find something in your house of appropriate value and then you try to barter for it at the coffeeshop (said negotiations again slowing down the speed of money).
And in such an environment where prices keep going up, you may find that you stop buying some things altogether (just too pricey). You might drive less, for instance, rather than buy more gas. This also slows down the speed of money.
Not an ecomomist, but what causes fear for me is increased taxes.
Do you favor decreased taxes? On me, an upper middle-class guy?
Yes or no, Luddite?
I don't care who you are...The only legitmate role of government is the defense of life,liberty and property. This shouldn't cost more than 5% of anyone's salary.
Yes or no, Luddite?
Why are you calling me a Luddite? I'm a Luddite who can run an x-ray photoelectron spectrometer, FWIW.
It could be dangerous, but it has its place.
Increasing the leverage for banks on their consumer loans is a fairly bad idea. Increasing the leverage for those making safe asset and insurance-backed loans is probably worth the "risk", however.
If a mortgage company has legitimate investors, makes (originates, not pays a premium to buy them from another originator) legitimate home loans, properly insures those home loans, and sells off all of those notes on the open market, then having a bank increase said mortgage company's leverage is probably not a very big deal.
Wanna bet that in the near future some clever fellow suggests that the SS privatization might be permitted to buy such insured, asset-backed securities that pay vastly more than the standard social security investment returns?!
If SS starts buying home notes, then even the over-priced California home market will be safe for another 3 or 4 generations of ridiculous overpricing (i.e. revisit this issue in the year 2100 AD).
True, so long as the mortgage company is not so large as to move entire financial and real estate markets. When this occurs there is the possibility of systemic risk.
We've done something very odd with the GSE's. I keep wanting to tell the the gold buggers that we almost have mortgage backed currency but haven't quite managed to articulate this point.
Wanna bet that in the near future some clever fellow suggests that the SS privatization might be permitted to buy such insured, asset-backed securities that pay vastly more than the standard social security investment returns?! If SS starts buying home notes, then even the over-priced California home market will be safe for another 3 or 4 generations of ridiculous overpricing (i.e. revisit this issue in the year 2100 AD).
Could happen. Might work. I'm routinely astonished that our economy works at all. Its such a Rube Goldberg machine. A testment to the power of self organizing systems.
Since Jan 1, capital gains on real property will be due upon sale... predictions for CA?
The decline of the price of computers / computational power is overall a very good thing. But for the owner of a computer, it means, at least in the short term, accelerated depreciation of an asset.
More important is the effect it will have as a stimulus on the economy. The markets always follow economic movement up or down. They never lead us out of a recession.
Not to burst your bubble (so to speak), but every short seller and retired hedge fund "guru" is spouting the same talking point about a "real estate crash" as if he came up with that theory all on his own.
But why look at theories when we have historical facts. We've seen, in just the previous generation, the entire systemic collapse of the American Savings and Loan system. It was the 1980's, and real-estate speculation had created a bubble in commercial real estate. The eventual real estate crash drove localized commercial real down some 50% in the areas hardest hit, while the national average turned out to be something like a 3% whack off of commercial real estate average prices. Presaging this collapse was a spike in unemployment, inflation, and an increase in the percentage of homeowners who were more than 30 days late on their payments up to some 6.5% of the mortgage-paying population.
Now, if you are TRULY worried about a modern real estate collapse, what you should be interested in tracking are the figures for current unemployment as well as the percentage of mortgages that are more than 30 days past due.
If you don't have access to those figures then you aren't in a position to seriously worry about the problem. At best you would merely be repeating speculation from others.
If you do have access to those figures, then you'll quickly see that we are today nowhere near the dismal shape that we were in back in the late 1980's.
But I will admit that the world can always change on a dime. If those figures spike, then owning real estate is historically a bad idea. During that "crash", your investment might be devalued by as much as 50% for as long as a decade (worst case). It's happened before, after all.
Deflation/inflation are never good. The policy goals to be pursued are flat yield curves and constant currency.
I agree with you. Deflation due to increased productivity is the only good deflation. And any inflation/deflation due to changing the money supply helps some people at the expense of others.
How about responding to the gold standard comment from MonroeDNA? ...at least it would be out of the control of the government...
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