Fed cuts rates -- again

Citing a weakening US economy, the US Fed dropped two of its key interest rates in the last hour and both by ¾%. The Fed Funds rate (the rate banks charge each other) is now 2¼% and the discount rate (when banks borrow directly from the government) is now 2½%. This was actually less than the 1% most were predicting.

Reviewing the statement, a couple of things stick out. First is the concern about inflation and an attempt to level things out. I can understand what the Board is trying to do, but it's also hard to see how putting more money into the system would help that factor. As you increase demand, you naturally increase prices -- not lower it or level it out. People on fixed incomes are having a hard time making ends meet; and many commuters are getting sick of paying $4 a gallon for fuel.

Second, the Fed is warning that the housing market is going to be depressed for the next few quarters. The fact so many people have had foreclosures the last year or so as adjustable mortgages reset with the five year clock they're on; plus that many more are now upside down (they owe more on their mortgage than the houses they're living in) is going to be a major issue in this year's election. It looks like the Fed is trying to ease things up so the reset rates are less and therefore fewer people will foreclose over the long run.

However, one also has to wonder whether there might be a bit of political interference happening here. In 1984, there was a tight race between Ronald Reagan and Walter Mondale. Contrary to popular wisdom Reagan didn't win a landslide by making fun of Mondale's "inexperience" (even though Mondale had been a veep and an Ambassador and one of the few people in America, in fact the first VP ever, to know the nuclear launch codes). Nope. It was because just before the election, then Fed Chair Paul Volcker -- who had caused a huge headache for Jimmy Carter by letting interest rates float in 1979, making a soft economy even worse -- orchestrated a cut in the Fed rate by 1¾% in one fell swoop.

Few people then knew what the Fed was or its alleged independence from the Treasury Department; so they credited the rate cut to Reagan, and he won a clearly unearned second term in office.

Now, with far more people (indeed the vast majority) in America playing the markets they're not so stupid anymore. If the Fed is holding back for an October Surprise, the people who actually vote won't be fooled; if the only ones to benefit are the banks who've squandered their depositor's trust to play the risky commodities market where everything -- even mortgages and credit cards -- can be traded for a song. And the first thing Obama or Clinton will do when they're elected, or what I think they should do, is fire the entire board and start over with bankers who actually know and live in the real world; and not just Level Two stock quotes.

Then -- and only then -- will Americans have a Fed that is responsive to the people and not the financial institutions or brokerage houses.

Sidebar: The US Dollar hit another low today -- it's now on par with the Swiss Franc. That is definitely not a good sign.

Vote for this post at Progressive Bloggers.