Why The Fed Should Not Cut Interest Rates

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 (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.

Comments

[J.E.C.]

If the Fed lowers the interest rate it's because it's the right thing to do. If they don't, it's because it's the right thing to do.

[droskoph]

I hear and obey. The Feds to the big banks - we hang together or we hang separately.

[Solution]

> 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 (CAT), have said business hasn’t been this bad in fifty years.


Wow, so this is perfect reason for Fed to lower the interest rate !!!

[Solution]

> 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 (CAT), have said business hasn’t been this bad in fifty years.


Wow, so this is perfect reason for Fed to lower the interest rate !!!

[wixeywaxy]

The issues described in this article set the scene that existed before the first 1/2 per cent cut, so a further reduction is a bail out for the people who profited from the creation of this problem. That bail out doesn't come for free. In the end it's paid for by devaluing the savings of all the responsible persons. Think Bernake's is a captive of the Wall St insiders? We'll be sure shortly. WW

[User 11976]

If...we cut rates...which I believe we should, not just this 1/4 point but later on a second 1/4 point...then we will STILL be more than 2% higher than we were a couple/few years ago.

We SLASHED interest rates dramatically and quickly during the "Nasdaq/tech bubble-bursting period" and did NOT experience runaway inflation along with a "dramatic devaluing" of the dollar during that 3 1/4 year period...AND we are supposed to believe that a reduction in our trade imbalance and an increase in American jobs and overseas sales (exports!) is a bad thing?!?!?

Yes, home prices are down...but not lower than they were a few years ago...lower than they were during the last 1-3 years of the "Real Estate Bubble" (direct correlation to the Tech Bubble phenomenon?)...but for those who bought homes 5-10 years ago, they are still sitting on a significant increase in real estate values. Lesson to be learned...buying a home to live in...long term...and it can be a good investment...trying to "daytrade" a home...you can get burnt just like you can with the stock market.

The fed should and will lower rates....for a short period of time...allow people and lenders a chance to get out of some bad loans, etc...give "investors" a chance to pick up some "bargains" and wash out the excess inventory in the system (Which will help "level off" the home prices) and once the housing market has stabilized...then the fed will look to raise the funds rate again. We raised rates too fast (because Greenspan wanted a specific "equilibrium"... rate to retire at) ...and now we are correcting the "too high" scenario.

[Solution]

I totally agree. Give "poorer" people a chance to retain their home while sacrificing "richer" people a little bit. Jim Rogers is the first one should sarifice. Japan has lower interest rate and they don't have curreny problem. The cause of devaluation of dollar is mainly the budget deficit and trade deficit. Lower interest should cure trade defict. As for budget deficit, we need to stop the war. Select next president carefully.