The Fed Meets Today

The Federal Reserve Bank’s Federal Open Market Committee meets again today for another two day tilt. Most analysts are expecting a quarter point rate cut (they will announce tomorrow). Readers of this blog know that I am opposed to any further cuts in the federal funds rate.

From the Fed’s website: “The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.”

This essentially means that when the Fed cuts this rate, banks can get money more cheaply. The cheaper it is, the more banks are likely to take (especially in times of crisis, like now). The problem with this is that all of this money goes out into the world looking for things to buy (like houses, wheat futures, gold) in order to make a better return. This money creates demand. Demand makes prices go up.

And that’s inflation.

Given that we are facing insane inflationary pressures on oil and other commodities (which, in turn, causes prices to rise down the line on everything), it makes no sense to create extra inflationary strain by putting more money out there. Especially given that there are other options for banks that require additional funds.

Right now, inflation is the biggest danger we face in an exceedingly dangerous economic climate. It’s time to step on the brakes.

Here’s a good overview of the issues from Mark Felsenthal at Reuters. Here’s a supporting editorial from John Chapman of the American Enterprise Institute.

Advertisements

One Response to The Fed Meets Today

  1. […] I agreed with. The first was about Bernanke’s rate cut mistake. Readers of this blog know where I stand on […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: