To Cut or Not To Cut: Bernanke, Don't Be Grinch

Bernanke spoke yesterday - again - and warned that the economy is facing further risks from the tumble of the housing market, subprime worries, and credit crunch. But one important thing that dominated in this testimony is a concern about the possible surge in inflation. And that brings me to something that has puzzled me for the last few weeks.

We’ve been hearing for some time now about the need and expectation that the Fed will cut once again before the year’s end in December. From the moment I heard that the first time, I thought "that can’t be right." And as discussions spread throughout the media about a definite Fed cut, I thought that I was obviously missing something. You already sense it- I didn’t think Fed will or should cut anymore. And I still don’t. Now even more. Thanks for all the cutting so far, but any cutting right now would be a bad choice…again.

Now, now, I know. There are many reasons why they should cut again, but there are many more reasons why they shouldn’t. Again, this is just my opinion, but so far the Fed’s cuts have just brought temporary fixes to the market. Actually, it just helped financials for the short-term. To remind everyone, financials are at the lowest point ever, markets are slumping, and housing is not improving (actually it’s expected to get worse, apparently). And add to that the disastrous effect that these cuts have on our surplus (uh…what surplus)/deficit picture, and you’ve got it. What have these cuts accomplished so far this year? One big nothing! When I say nothing, I mean nothing positive. It was already too late.

But they did accomplish something. The main reason why I thought that I’m missing something, and that the Fed should not cut at all any more, is the fact that, with these cuts, the Fed is accomplishing something that they are so “forcefully” fighting against- a surge in inflation!

When I heard that they cut again last month, I once again thought "that can’t be right". The dollar is slumping to the lowest levels ever, our purchasing power is dropping, commodities and import prices are skyrocketing- all that together translating to a massive inflation surge, and we are what- cutting? And then to hear right after that that Fed should cut again? That just doesn't make sense at all. It creates the very thing we’d want to avoid- inflation. Cuts also devalue dollar thus creating a further dollar slump, which then creates another surge in commodities and import prices, which then creates another surge in… inflation.

And Bernanke actually stated yesterday that “the economy faces risks from the housing market's slump as well as from a possible surge in inflation, the lower dollar and higher oil costs.” Possible? Actual, Bernanke, actual. It would brink on insanity to cut again. Not only that it would be a total receipt to increase inflationary pressures and further trouble to the troubled economy, but I’m asking again- what did these two last cuts help in the first place? N-O-T-H-I-N-G, absolutely nothing. A shortly-lasted blimps on the charts, with increased selloffs afterwards.

And even today, after even he (finally!) pointed out the “possible” (cough) risks of inflation and further dollar drop, we are hearing all over the media that the Fed should and will cut again in December. Ok, I am now definitely missing something. I can only repeat to myself: it’s economy, stupid! And I am obviously a stupid one. Economy, what’s that?