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Three-quarters of a point it is - Waaah! Waaah!

Tuesday, March 18, 2008

Boy, they sure whine a lot on CNBC - you'd think short-term interest rates were like 10 or 12 percent the way they were crying when they didn't get the full one-point cut. Next time, the Fed should just cut by 2.25 points and go directly to zero and just get it over with.

That's the real question for equity markets - what happens when we get to zero?

Here are the last two policy statements from Ben and the boys - it was near impossible to find the one from January since they've been doing press releases just about every day now. When they start doing press releases twice a day, then you'll know we're really in trouble.
It was about a complete re-write from last time and there were two dissenting votes in Richard Fisher and Charles Plosser who preferred to at least put up some sort of facade about "fighting inflation" and/or not throwing the nation's currency "under the bus".

Haven't they been expecting "inflation to moderate in the coming quarters" for about the last two years now?

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Tim said...

Erin Burnett just said:

"OK, let's talk about what this decision means - why it matters and what in the world did they accomplish by saying they're worried about inflation and cutting by 75 basis points?"

Anonymous said...

This is "tough love", Bernanke style ;>

Anonymous said...

So Tim, what would you be buying here? Financials?

Don't you hate when they say that..... it drives me crazy.

Anonymous said...

Buying? Tinned food.

staghounds said...

When it's the official policy of the central bank to water the currency, it's anyone's guess what to buy.

Whatever it is, it's better than money- which is GUARANTEED to lose value.

As Tamara said, here we are on the deck of the U. S. S. Dollar, and everyone is saying "Wow, look at the level of that water going up!"

Anonymous said...

Bernanke MUST think that there is something that will stop the US Dollar from imploding. But I have no idea what that could be.

And I know some commenter here once chided me, saying that we have already had a "dollar implosion", but there are two things to still be considered.

One, though the Dollar has dropped a lot against the Euro, the Pound, and the Yen, there are still some important currencies, most notably the Chinese Yuan, that still have plenty of room to spare due to pegging.

Two, if the Dollar has dropped this much so far, how much could it drop when/if there is a panic and everyone and their sister's half-cousin is dumping their dollar currency reserves? $4.00 Euro's? 35-yen dollars?

In that case, say hello to $10/gallon gasoline and hyperinflation that would make even Burns and Miller blush.

And hello CHRYSOMANIA, as gold is bumped up both in dollar terms (with inflation and as the dollar drops vis-a-vis other currencies) and in real terms (as finanical panic increase gold relative to ALL currencies). What would THAT make, $6,000 gold? I agree it sounds absolutely outlandish, but at one time so did a 12,000 Dow, a 5,000 Nasdaq, and an $800,000 600 sq ft. bungalow in California.

MelechRic said...

Having 2.25 points of headroom gives the market more hope than having none.

Asymptotic rate cuts approaching zero may be the strategy here. A form of Zeno's Dichotomy Paradox except with interest rates instead of distances.

Anonymous said...

That 2.25% rate is a target rate, not the actual rate the banks can borrow the money from each other. The reason banks do this is to maintain its reserve requirement. Those with non-performing loans that are written off fall short on their reserves, and so they must borrow the money from other banks until they can raise the capital themselves through new deposits or interest rate payments, or the sale of housing through foreclosures. The actual rate usually trades in a range, some loans banks make each other are higher, some are lower.

While a lowering of the rate can mean banks could be more inclined to make loans to consumers and businesses, they have not been doing so and are simply borrowing the money to meet their reserve requirements. Non-Borrowed reserves are now negative. Interest rates for mortgages and credit card debt are increasing

If anything, the credit crunch will be deflationary with regard to assets. Contrary to what most people believe is going on, the monetary base is actually shrinking. Money is not being created, it is disappearing. 43 billion in just the last 5 days.

Inflation will be dictated by the value of the dollar.


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