The Fed Is Losing It

It happened twice already. Whenever I updated my “how low can it go” table (8/16/07, 1/21/08), the Fed came out the very next day with an emergency interest rate cut. Today I read on Yahoo! some speculation that the Fed might do another emergency rate cut. So I’m not going to update that table again. I never understood why emergency cuts are necessary. I heard that the monetary policy has a 12-18 month lag. With that kind of lag, I don’t understand why waiting 1 more week for the regular meeting wasn’t an option and they had to do it right away. Unless the emergency was an anticipated fall in the stock market. Right now the options market is forecasting an equal chance for a 50 basis points cut and a 75 basis points cut from the scheduled FOMC meeting on March 18. I won’t be surprised if they do it tomorrow for another “emergency” because the stock market fell.

* Source: Federal Reserve Bank of Cleveland. Data as of March 7, 2008. Today’s Fed Funds rate is 3.00%.

If the Fed wants to influence the stock market, it’s not working very well. Every time they cut the rate, the stock market got a temporary relief. After a few days, the effect wore off. After cutting the Fed Funds rate twice in January — an emergency shocker 75 basis points cut followed by a 50 basis points cut — the stock market is back to where it was prior to the cuts and perhaps even a little lower. Meanwhile inflation is getting out of control.

My message to the Fed: stop messing with the stock market and get back to fighting inflation.

This article on Bloomberg said the market lost confidence in the Fed’s ability to control inflation, as evidenced by the real yield on 5-year TIPS falling to negative. I have those 5-year TIPS. They rose a lot in value in a very short time. Originally my plan is not holding them unless the real yield is at least 1.5%. I’m going to hold on to them for now. I’ll buy some stock funds first and worry about the bonds later.

See All Your Accounts In One Place

Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.

FREE E-mail Newsletter

Join over 3,000 regular readers and get new articles delivered to you automatically by e-mail:

No spam. Unsubscribe at any time.

Comments

  1. david says

    I have the TIPS Yield Curve rss feed and this is some recent data:

    10-MAR-08: 5-year=0.01%, 10-year=0.90%, 20-year=1.60%

    07-MAR-08: 5-year=0.08%, 10-year=1.01%, 20-year=1.68%

    I have no idea what this stuff means, I just remember reading that if the yield curve gets inverted, we’re in for some hurt.

  2. Anonymous says

    I’m no expert in finance, but the Fed appears to be acting based on the tyranny of the now rather than the long term. Governments from Federal to local are seeing large reductions in income due in large part to the stock market and the growth slow down. Our governments continue to operate at a deficit even in good times and then have the audacity to project good times to increase on top of that to pay for the debt.

    Then we have a slow down and/or correction and everyone freaks out and everything goes to hell. Inflation becomes less important to the government because it minimizes the old debt at little cost to the government. That’s why the market is more important right now and that trend will only continue as the boomers retire and draw more and more of it as income to be taxed. Its a house of cards. That’s my take.

    Maybe one day our governments will learn to operate responsibly. Based on the choice of candidates for president, it won’t be happening soon.

    Ted

Leave a Reply

Your email address will not be published. Required fields are marked *