Why The Fed Should Not Cut Interest Rates

by: Eric Schleien

As many of you know, the Federal Reserve may very well slash interest rates this week. With a weak dollar and oil nearing $100/bbl, many economic policy critics including Jim Rogers have said Bernanke should not be slashing the federal funds rate. Personally I have many problems with the Federal Reserve and have many of the same views as Rogers.

According to Rogers, it makes absolutely no sense for the Fed to lower the interest rate. With a rate cut, the dollar would tank even more and oil could easily top $100/bbl and inflation could potentially get out of control. Rogers also has argued that the United States may very well already be in recession. He said the housing and auto industries are already in conditions worse then a typical recession. Even big Dow Components such as Caterpillar (NYSE:CAT), have said business hasn’t been this bad in fifty years.

Rogers also claims that while a lower dollar does mean higher exports and probably a cut in the trade deficit short term, it would hurt us in the mid/long term. Historically no country has ever been successful mid/long term devaluing their currency. There is nothing wrong with keeping interest rates steady, even if it means driving the United States into recession (assuming we aren’t already in one). It’s a normal part of the business cycle.

If you keep trying to bandage short term fixes, there will be many more negative long term effects. He also referred to Fort Knox, saying there gold would only be able to prop up the currency for maybe two days and our Treasury Reserve of 60 billion dollars would last about five seconds.

Who knows what will happen in the long term, but if we keep going down this road we will undoubtedly have high oil prices, a terrible currency, a potential run on the dollar, and even hyperinflation. By not lowering interest rates and giving into short term greed, we help reduce the risk of high interest rates further down the road.