Another cut on the calendar
Traders are again pricing in an interest rate cut coming from the Federal Reserve. Apparently a 1.5% interest rate is not low enough, its still 50 basis points from the lowest levels during the Tech bust. The problem is yet again that low interest rates are being used to stoke the flame under the economy, the last time this happened an artificial housing boom was created.
Though cheap credit is ultimately the goal of the Fed during slowdowns, especially in today’s credit markets, it is also what fuels our bubbles. Replacing one bubble after another is no solution to the problem, just a transfer of blame and wealth. There will surely be one sector that benefits itself tremendously after the effects of cheap credit sweep the markets.
If anything lower rates certainly helps the finance industry which is still pushing unusually high costs on to borrowers. Banks are still stingy with credit and only making loans to creditworthy borrowers. And doing so has proved to be profitable. With lower rates and a growing money supply, banks are sure to prosper as loans are more profitable with less risk. Federal Interest rates of 1% means that the banking industry will become substantially more profitable due to high priced loans.
We’re back again to 2001, from 2001 it took nearly two years for the entire stock market to turn around. And considering that the 2008 meltdown is far worse than 2001, it may take even longer for the market to settle again. There isn’t much the Fed can do after 1% interest rates, after 100 basis points they’ll be paying people to take out loans. At any rate, another rate cut shows that the market is on the brink of meltdown. Pausing to see how traders react when Big Ben makes the decision might be a wise move.
