bobandted

Following Misguided Cuts, The Fed Is Trapped

The Fed did make a serious error of judgement when embarking upon this aggressive rate cutting cycle. It would not have been so bad had the Fed's timing coincided with rate cuts by other Central Banks but the unilateral move taken by the Fed has had disastrous consequences for most global economies. The plunge in consumer confidence, rise in inflation expectations, erosion of equity wealth and bubble in commodity prices has all coincided with the Fed's kneejerk policy, to cut rates at a time when inflation continued to be a nagging problem. Investment banks have thanked the Fed for the bail out by pushing the subsequently cheaper money into commodity classes, thereby penalising Main Street by pushing up energy and food prices to near-farcical levels.

With Central Banks elsewhere now being forced to hike interest rates to offset against a commodity inflation surge sparked by the Federal Reserve. If the Fed decides to sit on its hands and do nothing, commodity prices will go higher, inflation expectations will rise and the US consumer will find itself in an even deeper pit. While raising rates now will undermine the Fed's credibility, it may be argued the Fed has barely a shred of credibility left, and its policy decision should be focused exclusively on what is required to best serve Main Street in what is fast becoming a deepening crisis. There is no point in talking the talk if the Fed is not prepared to walk the walk. The ECB acts tough when it talks tough while the Fed is seen to dance around the fire. The Fed should not wait around but should raise rates by 0.25% tomorrow and signal more is on the way. Only tough talk, followed by tough action, will convince inflation-raising commodity bulls the game is up, at least for now.

Bob B