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.