I have commented already that Consumers are living off of Debt and Savings. This was compounded today in the retail sales numbers.
Particularly, the prices for big ticket durable goods have actually been declining. Deflation exists in the higher priced goods because consumers are scrutinizing these purchases much more carefully. Clearly, when there is less free cash available, the bigger purchases become more important.
That doesn't mean that the consumer is pulling out in any way though. They continue to spend heavily on apparel, and other general merchandise.
This tells me that they want to maintain their current lifestyles and it accentuates the risks that I see in a possible Fed Rate cut.
Remember, Wall Street wants a Rate Cut, but it is going to influence many additional risks. One of which it the consumer's willingness to pay more for goods and services, a.k.a inflation. I don't think the risk/reward ratio is worth it, because the focal point of a rate cut would would help bail out irresponsible lenders. Our free market economy will take care of them, if they are worthy of being taken care of.
The liquidity that's being poured into the economy may be enough, but it won't satisfy those that believe the Market needs more. I do not think the Market needs the rate cut that so many want, and I believe that it is irresponsible of the Fed to consider lowering rates when they foresee risks of inflation on the horizon. Change the policy first, then consider a cut. That's the responsible process.
My opinion will always be: if the economy remains healthy then the Market will work itself out. Right now there are risks in the economy, and the risks are the tightening access to money. The liquidity that the Fed is brining to the table though might be enough to tame the steep undulations which exist in the perceived evaluation of risk.
In other words, the risk premiums for credit worthy borrowers may lessen from this spike if the institutions realize that the Fed will not let the market for those loans dry up. If that happens the markets will begin to look much more healthy again.
The Fed is on the right track here, I just don't want them to push the envelope. If they do the risks will probably outweigh the reward.