Thread: Fed Lowers Rate Again, Ignores Inflation

Fed Lowers Rate Again, Ignores Inflation

David Frazier
Thursday, May 1, 2008

The Federal Reserve's Open Market Committee (FOMC) cut its target Fed funds rate yesterday for the seventh time since last September and essentially ignored the inflationary implications of another rate cut.
In its statement to the press, the FOMC told us nothing that we didn't already know. For example, the FOMC said, "Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further."

The FOMC went on to say, "Tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."

The FOMC repeated the statement about inflation that it made in its March 18 statement on monetary policy, saying that it expects inflation to moderate going forward.

Amazing isn't it? The learned professor and Fed Chairman Ben Bernanke, as well as seven out of nine of the other voting members of the FOMC, continue to think that lowering the interest rate at which commercial banks can borrow from one another on an overnight basis — the Fed funds rate — will somehow stimulate economic growth.

The Fed also apparently remains delusional about the negative effect that its significant cuts in short-term interest rates and increases in the supply of money are having on the value of the U.S. dollar and the resulting wealth-destroying aspects of its monetary policy.

As I stated in an article I wrote last Friday, "Fed Action Could Hurt Stocks, Economy," my research suggests that the Fed's aggressive monetary policy will serve only to increase inflationary pressures and lead to a further slowdown in consumer spending, as the value of the dollar resumes its downturn and gasoline, jet fuel and food prices in turn continue to rise.

My research also indicates that commercial enterprises will continue to reduce their capital expenditures as a result of the recessionary implications of the Fed's rate cuts.

Yesterday morning, the U.S. Department of Commerce reported that the U.S. economy grew at an annualized rate of only 0.6 percent during the first quarter of this year, while both consumers and businesses significantly reduced their spending and investments.

For example, inflation-adjusted consumer spending slowed to an annualized rate of only 1 percent during the first quarter, versus 2.3 percent during the fourth quarter of 2007, while gross private domestic investments declined 4.7 percent. Unlike prior quarters, all sub-categories of business investments fell including investments in operating facilities, business equipment and computer software.

Although stock prices initially responded favorably to the Fed's rate decision, equities pulled back sharply from their earlier gains during the last hour of trading yesterday, with the Dow Jones Industrial Average closing out the day down 12 points from Tuesday's close. Meanwhile, the euro rallied against the dollar, and most commodity prices rebounded from their prior day levels.

I've rarely criticized actions of the Federal Reserve, whose members have the difficult responsibility of implementing economic policies that will strive to achieve maximum employment and at the same time maintain price stability — in other words, to stimulate economic growth and control inflation. However, I now feel that our current FOMC is incapable of achieving either of its mandates.

With an inept Fed and a U.S. Congress in disarray about ways to improve the economy, my research suggests that stocks will continue to be confined to a sideways trading pattern over the coming weeks.

http://moneynews.newsmax.com/money/arch ... 080324.cfm

very bad move . but it stands right up with Dubya's Bear Searns bailout that should have never been done with taxpayers funds .