Fed Rate Cut Could Cause Major Problems

The WSJ offers five reasons why the Fed will cut rates but I'm not sure sure. Here's some of my analysis on this.

The Wall Street Journal, in their Marketbeat section posted five reasons why the Fed will cut rates.  They are:

  1. Inflation isn't out of control.
  2. Market conditions are still problematic.
  3. The market is expecting it.
  4. The housing market's troubles warrant it.
  5. They have little to lose.

In my opinion, the problem lies in #5.  Cutting rates will put more downward pressure on the dollar.  As I mentioned in my article on the Carry Trade, the impact of a falling dollar is both large and not fully understood.  How a falling dollar will impact these positions remains to be seen.

The Fed may indeed cut rates but everyone should realize there is no free lunch and that the law of unintended consequences is always alive and wel

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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Comments

  • anne reid

    September 06, 2007

    The impact of a falling dollar is not too serious. It keeps America competitive. The Japanese have revived their economy on the back of a weak currency and in a global economy, a weak dollar policy is not inappropriate. The real risk, IMHO, here is inflation and Bernanke knows that.

  • Sam Cass

    September 06, 2007

    Inflation is tame. It hasn't been a problem in years and there is no indication it will be in the future. Falling home prices will only depress inflation.

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