Fed between a rock and a hard place
The Federal Reserve Board meets again tomorrow to discuss the economy, inflationary factors and assess the current interest rate policy. Many analysts are undecided on which way the Fed will turn, will it continue to lower rates amid high inflation or pull back and let the market work itself out. Either action is likely to worry investors, high inflation eats away at returns while less credit means a stagnating economy and likely recession.
From here on out, each decision remains critical. Since the Fed opened its window and the auction block to institutional borrowers it has lent over $360 Billion. Keep in mind that this program was started in December of 2007, it has only been roughly 4 months for an average of $90 Billion per month. This kind of inflate and lend system is troubling many investors.
The economic stimulus package began today, the first people getting their direct deposits by Midnight tonight. This brings another $110 Billion to the money supply, putting the total stimulus aid at about $470
Billion dollars. In terms of M3 money supply, this represents a near 5% inflation rate just since last December. Annualized, the government is looking at 20% inflation.
The decision tomorrow will likely impress no one and upset everyone. Should the Fed go the way of the 1970’s and Volcker to raise rates to the moon in an attempt to reign in inflation, or is just one more rate cut the way to go to keep a liquidity crises from happening. Either decision shows a negatively impacted economy. Lowered rates spark concern of inflation, high rates could cripple the market overnight.
We’ll have to see what the Fed does. Speculation is that the Fed acts and cut rates by .25% to show the market its slowing its rate cuts but also limiting inflation. 2% seems to be the new bottom, I doubt the Fed or the market will allow these rate cuts to go on forever.