Why would the fed lower rate? | Forex Factory

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Why would the fed lower rate?

  • #1
  • First Post: Nov 20, 2007 11:05am Nov 20, 2007 11:05am
Here are my thoughts.
Inflation is definitely rising, and with the fed using the whole numbers now instead of excluding energy and food, that seems like a possible indicator to raise rates.
I think everyone, especially the fed is concerned about the statements out of opec this week. In order to help the dollar, a raise in rates would be beneficial. I believe that helps opec, too, since their dollars would be worth more. If it causes lower oil prices, it evens out with stronger dollars.
Lower interest rates may help banks, but it takes a lot more than 25 points to lower mortgage rates, so lowering the rates at this time doesn't really help consumers or housing market, right?

So given this information, I think all markets except wall st would welcome a rate hike. At the very least, leave rates where they are. I think lowering rates at this time would be a disaster.

Am I wrong? Please - no dollar bashers! I would like clear fundamental thinking to your thoughts about the fed and rates.
  • #2
  • Nov 20, 2007 11:14am Nov 20, 2007 11:14am
I dont think they should lower rates either... with oil making record highs recently, it will cause increased inflationary pressures, they might not full show in the CPI numbers for a while, as they are always lagged.
  • #3
  • Nov 20, 2007 11:31am Nov 20, 2007 11:31am
I totally agree with you that an interest rate cut is not in the best interest of the US economy.

Reasons:

#1 - Lowering interest rates increases borrowing... borrowing is what got the US into this mess to begin with.

#2 - This is a time when businesses and people need to save money. The damage is done. Buck up and eat it, but more borrowing just makes it worse.

#3 - Inflation is definitely on the rise... Not going to stop it by cutting rates.

#4 - If Paulson really wants a strong dollar, then cutting incentives for investing into the U.S isn't going to work.

the reasons go on and on... but yes I agree a rate cut should not be something that should happen.

The Fed's may look at it differently and succomb to lobbying pressure from big business ... namely the big banks which control the money anyway, and they don't want to lose money which they already have... so more bandaids may try to get applied to a wound that is not going to close anytime soon.

GirlFlyer
  • #4
  • Nov 20, 2007 1:35pm Nov 20, 2007 1:35pm
Surprise! Euro bulls don't give a sh*t. They just keep pushing it higher.
  • #5
  • Nov 20, 2007 1:49pm Nov 20, 2007 1:49pm
John Mauldin writes a great weekly newsletter. This past weekend he touched on the dilemma that the fed faces.

You can read it here.
  • #6
  • Nov 20, 2007 2:53pm Nov 20, 2007 2:53pm
All this Financial Credit Crunch is not the result of the 17 consecutive rate hikes by Ben. It is rather the result of the Bank's ultra BAD investment decision to lend money to cant-afford home owners. They approved loans to individuals who cannot afford to pay the loans in the first place.

These banks should DIE instead by not lowering the Interest Rates.

Come on! How often do we get to see Banks loose money? SELDOM! They make Billion$ and Billion$ year after year! So what is a few Billion$ write off would do to them? Of course they'd get hurt but thats the hard fact of business - win some loose some!

Now, lowering the Interest Rates just to satisfy the Banks? Where in hell is the Morality in there? Its like rewarding a cry baby everytime they throw a tantrum! Thats definitely NOT a way to raise a kid.

Unfortunately, when a cry baby starts disturbing the other babies in the nursery, you have to pacify that cry baby fast or you end up with a nursery full of cry babies.
  • #7
  • Edited 3:42pm Nov 20, 2007 3:06pm | Edited 3:42pm
i think fed will lower rates for next reasons,...
first is, the ecb doesnt want to higher them at this point, and they are still lower then the US, so if they will lower them it will be still higher then the euros,..and i think then they will expect the euro to raise them,...so it can become officialy a carry trade...by being long eur/usd u would then get paid for the interest...
second is because futures will be expired when that will happen,..and usually its a fresh buy after rollover...and the third is ...china companies-stocks still way undervalued fundamentaly, and since many their blue chips cant be bought on euro exchanges,...i think the dolar should loose value, and china will be again long...but i may be wrong so dont listen to me...
its just money
  • #8
  • Nov 20, 2007 11:21pm Nov 20, 2007 11:21pm
Rate cuts are immenent. If you are from the U.S. and your conscience bothers you don't sell the dollar. Home values in the US are tanking so no more equity to borrow and spend. Mammoth banks are writing off billions. Credit cards are maxed out. The stock market is extremely volatile and losing value.

A rate increase or even stepping aside could cause the economy to tank in ways this generation has never seen. I don't want to be an alarmist but things are teetering right now and the only weapon the Fed has is easing rates.

Quote
Now, lowering the Interest Rates just to satisfy the Banks? Where in hell is the Morality in there? Its like rewarding a cry baby everytime they throw a tantrum! Thats definitely NOT a way to raise a kid.

The Fed was created to protect the banks. They are one and the same. The Fed was designed to help banks in situations like this, to prevent a run and provide liquidity. Thats why lending practices are so loose. Its called fractional reserve banking. Google it.
"Its not where your at, but where your coming from"
  • #9
  • Nov 20, 2007 11:36pm Nov 20, 2007 11:36pm
If Washington does not curtail spending and begin to pay off the debt, it does not matter what the fed does, the dollar will inflate or deflate, but it will become worth less.
  • #10
  • Nov 20, 2007 11:44pm Nov 20, 2007 11:44pm
Thanks for the John Mauldin link. I heard him on an early morning talk show this past saturday and thought to myself, you need to check out his website, then I promptly dozed back to sleep and never thought of it again.

Thanks to you now I have his blogs linked for reference, he is great for drawing the macro economic picture and laying out all the possible paths forward.
  • #11
  • Nov 20, 2007 11:47pm Nov 20, 2007 11:47pm
Lowering the rates now and thus acceleration of dollar fall will eventually produce a lot nastier financial disaster than OPEC countries moving to other currencies - the US Treasury will run out of buyers for its bonds.
Then the inevitable default on the US national debt will kill all the major banks, investment funds along with retirement accounts.
Ironically, it will be caused by the current albeit temporary bailout of the banks.
"Luxury is one of the basic needs", (c), Don Corleone
  • #12
  • Nov 21, 2007 12:04am Nov 21, 2007 12:04am
I found this article today and found it interesting. Looks like there are political deals with Saudi Arabia and the US to keep oil in dollars. It makes sense. Things can turn on a dime though.

http://money.cnn.com/2007/11/19/news...ion=2007111915
"Its not where your at, but where your coming from"
  • #13
  • Nov 21, 2007 8:02am Nov 21, 2007 8:02am
athalon7, home values in the US are not tanking. there are some areas in the US where houses are very overpriced. California, Florida, NY to name a few, but most areas are doing quite well. I live in the Dallas Ft Worth are which is quite large, and home values here are still rising. I agree with burger king that there were too many people who were buying homes that couldn't afford them. And not everybody has maxed out credit cards. the problem is money is running scared from subprime as fear is winning out over common sense. this cause the problem to be more than it has to be. the credit problems are not just happening in the US either, which has me wondering why so many are running from the dollar. it doesn't make sense.
  • #14
  • Last Post: Edited 5:50pm Nov 21, 2007 5:25pm | Edited 5:50pm
Quoting bhale
athalon7, home values in the US are not tanking. there are some areas in the US where houses are very overpriced. California, Florida, NY to name a few, but most areas are doing quite well. I live in the Dallas Ft Worth are which is quite large, and home values here are still rising. I agree with burger king that there were too many people who were buying homes that couldn't afford them. And not everybody has maxed out credit cards. the problem is money is running scared from subprime as fear is winning out over common sense. this cause the problem to be more than it has to be. the credit problems are not just happening in the US either, which has me wondering why so many are running from the dollar. it doesn't make sense.
It's obvious there may be pockets where the credit crisis has not touched yet. But foreclosures are at record highs, the three largest builders are at junk bond status, and mortgage applications are slowing dramatically. More homes on the market and less money to borrow means less demand and more supply. Thus values decrease. Your right, there are pockets. But with credit tightening so deeply, the pool of buyers is slowing daily thus dropping demand by the day.

Again, I am taking a macro point of view and each area is different and you can cite pockets.

I post what I read.

As far as credit cards, I cite this article: http://money.cnn.com/2007/10/29/maga...tune/index.htm

http://money.cnn.com/2007/11/21/real...ion=2007112110

http://money.cnn.com/2007/11/16/real...ion=2007111909

http://money.cnn.com/2007/11/21/real...ion=2007112108

Quote
the problem is money is running scared from subprime as fear is winning out over common sense.

Greed won out over common sense some time ago. I am not arguing with you, BHale. Its good to be an optimist.
"Its not where your at, but where your coming from"
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