Stop the Rate Cuts!

That's the plea from Harvard's Martin Feldstein, arguing that low rates would help food and energy prices rise even higher:

Lower interest rates also add to the upward pressure on these commodity prices - by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.

Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.

An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise.

With food riots around the world in countires like Haiti and Egypt, and with already low rates having little impact on borrowing, Feldstein believes even lower rates will exacerbate problems abroad and hurt economic conditions at home.

Feldstein is no hawk -- he was among the most vocal economists calling for the Fed to move fast on cutting rates last year in response to the housing crisis.

But it doesn't look like traders are listening to this argument. Interest rate futures show that the majority of traders expect the Fed to lower rates this month from 2.25 percent to 2 percent:

Comments

[buyitcheap:]

Amen! No more cuts.

2008 Apr 15 04:17 PM

[buyitcheap:]

The ETF participation in these commodities is leading to some price distortion, no? Is an ETF a legitimate way to own the right to food? As opposed to actual contracts?

2008 Apr 15 04:18 PM

[HARM:]

Monetizing $Trillions in coming losses in the banking and mortgage sectors is pretty much the only tool the Fed has left. Whether or not it is "right" to do so for poor people in the U.S. or elsewhere does not even factor into the Fed's calculus.

They will continue to cut because it is the only palatable "solution" to the Wall Street Masters of the Universe that the Fed ultimately answers to.

2008 Apr 15 05:08 PM

[Ames Tiedeman:]

Agree! We are going to have a massive inflation if we are not careful.

2008 Apr 15 08:15 PM

[Hoot85:]

We -already- have massive inflation...hence the weak dollar against foreign currencies.

2008 Apr 15 10:12 PM

[mbacapitalist:]

Can't agree anymore! The last thing we need is for more people to continue spending like there's an unlimited bank account. The lower the rates go, the more expensive commodities such as oil and gasoline will get. It is unbeleivable that the American public continues to refuse the acknowledgement that the price per barrel of oil moves in inverse to the value of the US dollar. Kind of like FXI and FXP do.

2008 Apr 15 11:07 PM

[silver-bullet:]

Introduction Gold and silver as mainstream currency again, will prevent government from manipulating the value of currency. Every time interest rate is cut, money goes out of the pocket of those hold he currency. It is a hidden tax on the general public by the government.

Imagine, with precious metal as currency - cutting/raising interest rates would be meaningless to the Fed. It would effectively keep the government's hands out of our little piggy banks.

Think about this. With government printing less money, this will force government to be smaller, and smaller...

Smaller government - Just Imagine - SMALLER GOVERNMENT!!!! Ha ha ha ah ha...... YES!!!!!!!!!!!!!!!!!!!...

2008 Apr 16 12:41 AM

[Ames Tiedeman:]

Hoot: I said MASSIVE INFLATION!

2008 Apr 16 07:08 AM

[flow5:]

It isn't within the power or responsibility of the Federal Reserve to hold unemployment or even Gross Domestic Product to "tolerable" levels. In fact, to assume that the Federal Reserve can solve our unemployment problems is to assume the problem is so simple that its solution requires only that the Manager of the Open Market Account buy a sufficient quantity of U.S. obligations for the accounts of the 12 Federal Reserve banks. This is utter naivete.

2008 Apr 16 12:46 PM

[Jason Rines...:]

Great insights, all.

2008 Apr 16 06:31 PM

[ChiMike:]

The Fed has continued and will continue to overstep it's bounds. The Fed's original function was to serve as the lender of last resort - now, it's serving as an equity bailout mechanism? Jim Rogers knows what's going on...
www.youtube.com/watch?...

Buy commodities, any dip downwards is pure manipulation to make people freak out to a lesser extent.

2008 Apr 16 11:22 PM

[ChiMike:]

Rates should be market determined. Interest rates, like anything which is centrally managed from the intellectual ivory towers causes inefficiencies. Inefficiencies in this instance cause the boom and bust cycle which we have become so accustomed to. This cycle is, but should not be inherent to an economic system, at least to the extent which we experience it. When interest rates are set below the natural rate of interest, this causes malinvestment, once risk is correctly placed back into the asset class the malinvestment will be shook out (tech bubble, housing bubble, etc), however, the Fed responds by lowering rates once again which causes the cycle to repeat, but in a different asset class. Rinse. Wash. Repeat.

2008 Apr 16 11:30 PM