Ok, the Fed has rolled over and committed itself to turning the US dollar into the next trash currency. The 1/2 percent basis cut today was actually defended by the Fed Board on the basis - as the CNBC crawl stated - an
expectation of inflation to moderate in coming quarters
And the crude market moved up 75 cents in the half hour after the cut, the US dollar drop almost a half a percent in the same time. And traders talked about "inflating ourselves out of this recession."
WTF? More below:
Let me give you the meme for the next three weeks:
First, commodity prices will rally. The world prices commodities in dollars. As the dollar continues to tank, the world will continue to be willing to pay what they have been paying for food in their local currency. Therefore, dollar based commodity prices will rise.
Second, as inflation becomes a concern, the yield curve - future interest rates versus current interest rates will go up. This latest Fed rate cut is likely to increase the mortgage rates and tightening of lending for mortgages. Why?
Because loose monetary policy indicates increasing risk of inflation. Increasing inflation indicates that sometime soon interest rates must go up to decrease inflation. The spread between borrowing money for two years versus ten years is now over 2.25%. The 10 year bond is trading over 4.7% and it went up on the cut. So the Fed rate cut just raised 30 year fixed mortgage rates. Boy, that will help the housing recovery. In addition, that yield curve indicates increasing inflation risk - this could potentially cause mortgage lenders to tighten their lending criteria and especially their loan to value targets now because they are looking at increasing income risks.
Other side bar, in the end, the markets noticed - the Russel 2000 - the small and medium companies that fuel the US economy are not responding. The money managers are saying "Move your money into big companies with overseas sales because the dollar tanking increases their earnings in US dollars." These companies aren't expanding, the Fed rate cuts are just making exporting your business out of the US even more valuable.
Third, the US debt will continue to increase as the economy slows down - the cut ain't going to do a damn thing about US incomes for the non-investor class. And the dropping dollar is going to make the rest of the world less interested in buying US debt. So, the shoe that will drop is:
Four, US sovereign debt rating cut threats. Do not think this is a little thing - this is the same slippery slope that killed Enron in the end, killed Argentina as an economy and basically lets the World Bank take over the steering wheel. And the meme is already being tried out in Europe:
Privatize social security, don't even think of any government single payer program for medical bills (since you can't afford it) or watch us put your economy and government budget in the dustbin.
The Fed rate cut made a lot of traders a lot of money but is, very possibly, the bullet in the head of single payer. No President will sign a single payer law if they have a memo saying do "do this and we take your AAA credit rating away."
This Fed funds rate cut was the Berlin Wall to a lot of expected progressive actions in 2009. I'm so mad I could break something.