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Is the Fed Fighting Inflation or Recession?

Article Submitted by: bankinvestor
Economics and Currencies


The Fed is fighting inflation and recession at the same time. Can it work?

 

Submitted: Feb 28, 2008    Views: 699    Comments: 1    Likes: 1   


I love the way the Fed can change its focus and direction from one economic release to another. From fighting inflation to spurring economic growth a the drop of a hat, it it looks like Bernanke and company will drop rates another 75 or 100 basis points all the while pounding their desks that they are inflation-vigilent. Economic growth continues to spurt along along barely avoiding the technical definition of a recession as the American consumer is slammed by fewer jobs, lower housing prices, higher energy and food prices, and the prospect of higher taxes. Investors face the prospect of investing a bloated stock market with more minefields ahead or bonds and other fixed-income securities yielding less than 4.00%. The good news? Well there is a check from the government in the mail (find out how much your household will receive here). Here are the scenarios for the US economy that I see:

(1) Fed lowers rates again and again. Inflation and devalued dollar damage the US further. Stock market has a terrible year. All is not well.

(2) Fed curbs interest rate cuts. US enters a short recession. Credit market and mortgage market crisis finally reaches an appex as bad loans are flushed out of the system. Banks and financial companies slowly recover. US economic growth and stock market returns look good again 2009 or 2010.

(3) The Fed is genius. Inflation stays below 3% as they like it. Rate cuts and government stimulus package boosts economy. Stock market powers to a great return in 2008. The housing market recovers with mortgages rates and home equity loan rates low again.

Which do you see happening or do you like another scenario?

 

 


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Comments Received:

Sam Cass
Sam_Cass

I hate to say it but I see #1 as the most likely scenario. The Fed is in a pickle. The financial system is literally melting down - see articles on Auction Rate Securities - but at the same time inflation is on the rise. I don't see many attractive options. I do think that at some point there has to be a reckoning. As Japan in the 1990's showed, lowering interest rates isn't a cure. The banks and homeowners, and investors are going to have to take their medicine. It's going to get worse before it can get better.

Posted: Feb 28, 2008



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