The Fed Won't Cut

It's been a while since we've seen an economic release where there's solid signs of negative growth for this quarter and in the future. GDP showed how slow things were in Q1. Since that quarter, we've seen some continually firm data: Payrolls, ISM, Durables, Factories, Confidence, Earnings. All have been positive.

With all of those kinds of reports, we're also very likely to see the equity markets perform just as nicely. Why not? If you have consumers who are seeing an increasing income rate and confidence rate push the service sector (You know, that sector that represents 65% of our economy) then it's only natural to see higher revenues for companies.

The only thorn in the thesis is that continually nagging statement that comes up just about every time that a Fed member speaks: Resource utilization. If our resource utilization is as high as it is right now (unemployment is sitting at 4.5%), then wouldn't an economy poised to grow even more call into question the the Fed's next move?

So many are looking for a cut from the Fed. No way. If our resources are already pushed beyond full potential, then any continued growth in our economy is going to push said resource utilization even more. The Fed will sit on their hands for some time to come. But, their next move could very easily be more interest rate increases. Gulp.

Comments

[Tom B:]

A cut would be disastrous for the economy, IMHO.

2007 Jun 06 08:51 AM

[huangjin:]

The various groups of inflation hawks, including memebers of the Fed, have been saying since the last hike in June that the next move is likely to be up. Just wait until the bond vigilantes show up.

2007 Jun 06 09:06 AM

[J.Stevens:]

Over 50 years ago, I recieved a bronx cheer in an econ class for suggesting that Keynesian economics might be as dangerous as it seemed to be useful. My argument was that it could be an uncontrollable genie. Once released the genie might inevitably seduce the public into believing all economicly painful setbacks, even without a crisis, should be relieved by another glass of "deficit" booze. If borrowing rates are lowered enough, no one would really need to earn a living.
You can buy a lot of votes by playing Santa Claus at the expense of the future.

2007 Jun 06 10:53 AM

[Tom B:]

In "The HitchHiker's Guide to the Galaxy" Earth's original colonists decide to make leaves the official currency which, as I recall, leads to massive inflation (and deforestation).

2007 Jun 06 11:59 AM

[wixeywaxy:]

I'm pleased to see that the replies above are not hoping to see, nor do they think a Fed rate cut would be good for the economy in the long run. Interest rates, adjusted for inflation albeit low, are still very low. There are two sides to a coin, as the saying goes, a reasonable rate of return is necessary in fairness to the entity making the loan. The notion that very low interest rates are good for the economy is bogus. At some point low interest rates are a negative. I will make another observation. The notion that the Fed is responsible and able to fine tune the economy is foisted on the public to direct attention away from irresponsible government fiscal policy. Vic

2007 Jun 07 04:05 PM

[Leslie:]

Hope you are doing ok...

2007 Sep 24 04:03 PM