Flying Pink Unicorns

Fed's next steps.

The fed next meets to discuss monetary policy on April 29/30, next week. I hearby call on the fed to stand pat, and leave rates unchanged.

As you all know as loyal readers, I have advocated a policy of dropping interest rates, fast, and keeping them low, as well as fiscal stimulus, to prevent a possible implosion of the financial system, and to prevent the recession we are in from becoming needlessly deep. Fortunately, Fed Chairman Bernanke has been thinking along exactly the same lines! I love Bernanke!

The Federal Funds rate, the most important rate set by the fed, is now at 2.25%. With inflation higher than that, at between 3-4 % depending on which measure you look at, interest rates are, in the jargon, highly stimulative. Real short term interest rates are negative, a fairly rare condition, which only occurs when the fed is worried about DEFLATION (2001-2004) or when the fed is concerned about a recession becoming severe (1990-91, 2001-2002, and now). In simple terms, the fed has the pedal just about to the medal, and is willing to let the dollar twist in the wind in order to try and stimulate the economy.

As my friend Andrew and many others predicted, the previous rate cuts have caused the dollar to continue to tank, gold and oil prices to explode, and other commodity and food prices to rise sharply. I consider these reasonable prices to pay to try and ensure that the economy doesn't slide into a deep and long recession.

I now call on the fed to stand pat. I am delighted with interest rates exactly where they are! I'm not worried about inflation, at all. The US economy will weaken, north of a million more jobs will be lost, and consumers will continue a shopping strike. (Read this interesting article to learn why. http://www.realclearpolitics.com/articles/2008/04/the_great_shopping_spree.html )

The weakening of the US economy and the consumers' shopping strike will put sharp downward pressure on prices, even oil prices (for complex reasons). So it is not because of a fear of inflation (the usual argument against interest rate cuts) that I advocate the fed standing pat. Instead, I want the fed to have further ammunition in case the financial markets weaken further, or there is some crisis. If rates are lowered much more the fed will have run out of bullets, a really bad idea in a world full of armed people trying to sneak up on you.

In addition, I think standing pat will signal to the oil and currency markets that the fed isn't on a wild, drunken, damn the dollar spree (unlike the Bush administration, which has been on one since January of 2001). By standing pat, the fed will say in essence, "don't worry, competent adults are in charge of economic policy now. Fear not, and invest in the US).

This is what I would like to see. As for a prediction, a 25 basis point, or .25% point cut would not surprise me in the slightest.