Dollar Gains as Fed Runs Out of Room to Cut Rates

The Federal Reserve has officially run out of room to cut interest rates. For the first time since August 2007, they left interest rates unchanged at a target range of 0 to 0.25 percent.

The dollar rallied because the Fed did the minimum of what was needed to pacify the market, which was to say that they could purchase Treasuries but are not going to do so right now.

Currency traders were looking for something more radical such as inflation targeting or a bold announcement that they would start buying long term Treasuries in size - which would have been dollar bearish. Interest rates could remain at current levels for the next six months as the central bank focuses on credit easing.

The Federal Reserve was pessimistic about the outlook for the US economy and said that inflation could continue to remain weak in the coming quarters.

Comments

[Prudent Man...:]

The dollar appreciates because we are printing more of them. I missed that econ class.

Short covering can sure suck people into a market.

Jan 28 05:58 PM

[CJJ:]

Actually, If you have 100 pieces of wood and fire destroys 80 of them and you replace 60 of the burned pieces with new pieces it is still a net loss of 20 pieces of wood. But thanks for bringing economics into the mix. Can we start to write off classical, macro, basically all economics at this point. It seems to forget markets involve people. Odd, you'd think some of these "smart" people would have figured that out by now.

Jan 28 09:16 PM

[Balderdash:]

Wood is a real resource while money is arbitrary. You're forgetting that central bank/sovereign credibility affects a currency value. So if we replace only 50% of the 'destroyed' (in the fractional reserve sense) money with freshly printed cash, it still may negatively affect the dollar value.

Take person A and B and a bank. Person A has $100 and a loaf of bread and deposits the cash it in the bank. Now person B borrows $50 of this and buys a slice of bread from A. A then deposits $50 and his bank account balance is $150 (the money supply increased by $50). B eats the bread and defaults on the loan.

The bank prints up the deficit $50 and gives all $150 it to A, and the money supply remains permanentely higher and now represents a higher base to pyramid credit on. Eventually he deposits this back in the bank and the cycle restarts.

Eventually A catches on because as the new $50 circulates his cost of flour and yeast are rising and he loses confidence in the amount of money he's receiving for his bread slices, plus there's less bread overall and more money.

But more to your point -- let's say the bank only re-prints 50% of the 'lost' deposits because A isn't demanding ALL of his money, just some of it. As long as A doesn't notice, that's fine, but if A finds out that B is essentially eating his bread for free, he won't take any amount of money for his loaf. Either way, there are now $125 in the system, more than we originally started with.

On Jan 28 09:16 PM CJJ wrote:

> Actually, If you have 100 pieces of wood and fire destroys 80 of
> them and you replace 60 of the burned pieces with new pieces it is
> still a net loss of 20 pieces of wood. But thanks for bringing economics
> into the mix. Can we start to write off classical, macro, basically
> all economics at this point. It seems to forget markets involve people.
> Odd, you'd think some of these "smart" people would have figured
> that out by now.

Jan 29 10:07 AM

[carey_jim:]

It seems odd that the United States Treasury is on the verge of asking people to give them money (negative interest rates) for the 'privilege' of owning Treasuries.

Maybe this is the reason the dollar is rising in value. Why else would people continue to loan uncle Sam money unless they think the dollar will rise relative to their own currencies?

It took centuries before people realized that negative numbers were not just embarrassing oddities resulting from abstruse algebra problems and therefore had to be hushed up and hidden from view.

It took even longer for mathematicians and scientists to recognize that 'imaginary' numbers were just as valid and useful as other numbers.

It makes me wonder when the United States Government will start issuing imaginary Treasury Bills? (Or have they already?)

Jan 29 03:52 PM