Today (September 17th), the Wall Street Journal (WSJ) cover has a perceptive article entitled, "Too Much Hope May Be Pinned On Fed's Powers."
The article questions the ability of a Fed rate cut to have an immediate impact on our present economic and financial worries, including, "a worsening housing slump and high gasoline prices, which are damping consumer spending and fears of further defaults on the billions of dollars of low-quality loans that have been used to finance mortgages and corporate takeovers."
We agree, strongly.
The article argues that, "Even if the Fed carries out a series of rate cuts, the economy and stock market are likely to be dealing with the fallout from these problems well into next year."
Again, we agree.
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The article goes on to make the point that just as the market quickly recovered after the Fed cut rates in 1998, "many money managers are betting stocks will surge if the Fed cuts rate now."
In fact, the article explains, many forecasters cite the rapid reaction of our economy to Fed rate cuts in 1998, as evidence that a Fed rate cut now will have an immediate and positive effect.
But the article emphasizes that there's a difference between the two situations.
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
The WSJ makes the most perceptive observation. It argues that, "Unlike in 1998, when the real troubles were imported from abroad, today's problems are homegrown: the housing meltdown and the credit crunch that has followed."
Yet again, we agree whole heartedly.
Later in the article, Jan Hatzius, chief economist at Goldman Sachs Group Inc. is quoted as saying, "We should expect further problems in the financial markets from the housing troubles." He goes on to say that today's trouble, "is more serious than 1998, by a significant margin."
We say, "Spot on, Mr. Hatzius."
On the more bullish side, the WSJ quotes a Mr. Ethan Harris, chief U.S. economist at Lehman Brothers, who sees our economic growth bottoming out at an annual rate of about 1.55 or 2 percent in the first half of next year, down from a 4 percent rate in this year's second quarter, assuming that the Fed pulls out all the stops and does everything to get things going again.
Here we have problems. The so-called 4 percent is not a pure, year-on-year increase of 4 percent. It is the increase on the previous quarter, annualized. As such it means little and could even be said to be misleading.
We believe that the Fed fears inflation being made worse by a plunging U.S. dollar. We also feel that the Fed is realistic about what it thinks it can achieve and what it can not achieve by lowering its Target Rate.
The Fed has already lowered its Discount Rate, pumped liquidity into the system and lengthened the maturity of that liquidity.
In short, the Fed has ensured that if our banks need funds to lend, they are available and at a reduced cost.
[Editor's Note:Buffett Says This Book Made Him Billions]
As we have said many times, our banks are now extremely nervous about credit and, as we are now in economic contraction, credit worthy loan demand is likely to be falling, in aggregate.
Therefore, we feel that our Fed does not see any real benefit to our economy by reducing its Target Rate. However, it may be "forced" to do so, for what we term "confidence spin", by the weight of public and political opinion — opinion from which it was specifically established to be constitutionally independent!
So, there is now apparently, a good chance that an unwilling Fed may be forced to lower its Target Rate, by a token 0.25 percentage points, despite the fact that it feels it will do little good and possible much long-term harm, with our dollar in freefall.
We feel that our Fed was made "independent" for the very good reason of financial and economic prudence, in the national interest. We believe that the current political, media and market pressure now being brought to bear upon our Fed, to lower its Target Rate, is both illicit and counter-productive, in our National Interest.
Editor's note:
Big Government Lies Exposed. Go Here Now.
Bernanke Reveals `Fiscal Crisis` Ahead
Buffett Says This Book Made Him Billions
