Friday, September 22, 2006

Fed Reserve is Trapped

The Federal Reserve Board decided to leave rates unchanged at 5.25%. This was the second meeting in a row where they decided to pause.

Reasons To Raise Rates:
  • Inflation Worries. As "readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."
  • Attract Inflow of Foreign Capitol.
Reasons To Lower Rates:
  • Recession Fears "The moderation in economic growth appears to be continuing"
  • Don't want to cause a meltdown in the housing market. As there is already "a cooling of the housing market.
The Federal Reserve Board is trapped. They are in a very tough position. I don't blame Ben Bernanke as it was Al Greenspan who created this conundrum.


  1. I agree with the this "trapped Scenario." The bond market is already pricing in a cut as the next more. However, I think that defending the dollar is a big issue. Perhaps when the cuts really start the bond yields will be stable or start moving up due to sharp declines in the dollar. It will make no sense for foreigners to hold dollars based assets.


  2. The irony is that there is a growing body of thought that deflation/stagflation is the real concern - not inflation.

  3. The Feds will lower the rates soon enough. Likely sometime next spring. The powers that be DO NOT want to see a housing meltdown.

  4. Greenspan really bleeped up his legacy, though I blame 9-11 for a big piece of it.

  5. My bet: Bernanke will keep the rates stable. We are in an election year and the incumbent party (Republicans) will put pressure on the White House and the White House, in turn, will "ask" the Fed to keep rates stable for now.

    BTW...You wonder why gas prices are falling nationally two months before Congressional elections?

  6. >The Feds will lower the rates soon enough. Likely sometime next spring. The powers that be DO NOT want to see a housing meltdown.

    Housing will melt, until the bulk of the exotic mortgages has reset and it is clear who is still standing and who is foreclosed upon. That should be in 2009. The FED can do nothing about it, except starting a hyperinflation that will make real estate valuable as wealth storage but destroys any future power of the FED.

  7. Its a big game of Jenga, and the fed wants to skip a turn.

  8. I don't know that pointing to 9-11 is
    accurate. I remember the stock market in free fall before that event , and the markets reversed not too long after. Yes, there was a recession due to the economic events prior to 9-11,but not after.

  9. fogcutter said:
    "When a market, any market is going up, it feels like it will go up forever. When a market, any market is going down, it feels like it will do so forever. Neither is true."

    Very well thought out post!

  10. fogcutter said:
    "Sacrifice of the few to save the many? Well, I don't have any exotic loans and I sold near the peak, so I am cool, but I have friends who have just started bleeding out of their eyes, and the real pain hasn't started yet."

    You also don't have a roof over your head that isn't subject to the vagueries of inflation/the economy ... or the whims of a landlord. In brief, you have no "safe harbor", you've left yourself exposed in regards to one of the most fundamental needs of mankind ... Where you're going to live. Good luck. Hopefully (for you), your doomesday prophecy won't come to be ... as you'll be the first to suffer.

  11. Although prices continue to decline - and will continue further - good deals will always be good deals - creative mortgage financing allows for the average American to achieve "the dream"