*** SPECIAL NOTICE ***
The Fed made a bold, but poorly conceived, move yesterday by lowering its main benchmark interest rate by half-percentage point, and by inference, lowering borrowing costs throughout the economy.
Although the action was designed to forestall some of the adverse effects of the global/domestic credit crunch, it had just the opposite effect immediately as stocks surged over 300 points, the largest one-day gain in years.
This was the first time the Fed had lowered interest rates in more than four years. Indeed, we have a very soft economy right now, but the question is whether or not this move, or others to come, accurately enact the right solution for the “right” problem.
The Fed didn’t lower the price of tuition for schools. Indeed, it can’t.
The Fed didn’t lower the cost of a gallon of milk. Indeed, it can’t.
The Fed didn’t lower the cost of prescription drugs or healthcare services. Indeed, it can’t.
The Fed didn’t lower the cost of grains, metals, or other raw materials. Indeed it can’t.
No, the Fed chose to bail out the financial speculators who, by using easy money and “cheap” credit, gambled and lost in hedge funds, equities, and real estate. By the way, not all of the speculators were Wall Street sharks in pin-striped suits and ties. Many “average people” used come-on schemes and cheap money to buy things they couldn’t afford, and later defaulted as the leverage unwound.
In its strict about-face from fighting inflation and the real ravages of cost creep upon corporate profits, household finances, and the economy, the Fed used the wrong tool, sent the wrong message, and, based upon the upsurge in the stock market, achieved the wrong result.
Much more to come….
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