The Federal Reserve surprised a lot of people today, including us, here at RoutingByRumor.
They announced another cut to the target federal funds rate, this time it was 50 basis points, or 1/2% (read the Fed’s announcement, here). That is on top of the 75 basis point or 3/4% emergency cut announced eight days ago. This brings the overnight bank rate down 125 basis points in the past week, to 3.00%. The only member of the Federal Reserve’s Open Market Committee to vote against the latest rate cut was Richard W. Fisher. There’s a black sheep in every herd.
The Fed must be very, very concerned about the economy. But they can’t repeat these tricks forever. Eventually, they will run out of string, and “eventually” is sooner than you may think. Just think about it… Another two cuts like those in the past week, and money will almost be free.
Have you ever come across a vending machine that was set up to dispense product without having to insert any money? You can find these machines in some company cafeterias. I can still remember the time that I accompanied my father on a trip to a company he did business with. I must have been seven or eight years old at the time. That company had such a soda machine. Like any young child, I would push the buttons on every machine I’d come across, trying to get free gumballs, candy, soda or whatever. And don’t forget to check the coin return for some free money. Of course, I had to press every button on this soda machine, too. Every time I’d hit a button, another can of soda would be dispensed. I thought I hit the jackpot. The man who had to put all those soda cans back into the machine was not as amused as I was.
Now, if the Fed keeps lowering the funds rate, we figure that pretty soon, the banks might set up their ATMs to dispense free cash. It would make the kid in me very happy. I could just stand there all day, pressing buttons.
What’s next, banks giving away free toasters, blenders and TV sets? I remember those days too. Actually, I could use a new television, since in February 2009, when broadcasters stop transmitting analog signals, my current televisions will no longer work (at least not without a digital-to-analog converter box). Gee, Mr. Bernanke, maybe this was a great idea after all.
Then again, maybe not.
In fact, maybe black isn’t such a bad color after all. I like black better than red. Black goes with everything.
Maybe following the herd just leads you to the butcher sometimes.
So, they’re making money cheap, which should encourage people to start buying homes again… and cars, and televisions, and computers, and everything else we don’t make here any more.
Who will be hurt the most by these aggressive rate cuts by the Fed? People on fixed incomes and retirees. You can’t depend on the stock market these days. Putting your nestegg into stocks, even if diversified, is just slightly less dangerous than playing Russian roulette. Inflation was already outstripping anything you might hope to earn from a bank CD or insured money market account.
With the rate cuts in the past week, bank rates have fallen through the floorboards. I just checked Bank of America’s website… Putting $10,000.00 into a 1-year CD or a money market account will currently get you an APR of slightly more than 2%. To add insult to injury, if by some miracle you manage to earn a few dollars in interest, it’s taxable income. That dismal rate of return is sure to go even lower over the next few weeks and months, especially if there’s another Fed rate cut. Just a few months ago, 1-year CD rates of 5% were commonplace.
Make no mistake about it. The faltering stock market and plummeting interest rates on instruments such as certificates of deposit, are very bad news indeed. You will see increasing numbers of elderly Americans, who thought their golden years would be reasonably secure, now faced with loss of their homes, or worse.
Time to start stuffing the mattresses.
In his State of the Union Address two nights ago (read the full text here), President Bush touched on the need to increase exports. Funny, but I didn’t catch him mentioning the need to limit imports. In fact, President Bush never mentioned the phrases “trade deficit” or “imports” even once during his State of the Union Address. Rather, he said “we are pursuing opportunities to open up new markets by passing free trade agreements“. That’s wonderful. Just what America needs. More jobs going overseas. More cheap imports flooding the U.S. More unemployed American workers. The imbalance between U.S. salaries and those in most foreign countries is so great that we will never be on the winning side of any free trade agreements. Have any free trade agreements we’ve signed in the past resulted in a trade surplus (I think that’s what you’d call the opposite of a trade deficit, but since we never hear the term, I’m not sure that’s correct). Have they ever even resulted in balanced trade?
Thank God for term limits. Could you imagine four more years of this? Our trade deficit is already so lopsided, that unless we put limits on imports, we can never hope to make a dent in the trade deficit.
Cheap money will allow very few people who are at risk to avoid foreclosure on their homes. For the few it might benefit, our advice is to postpone the celebration, because cheap money won’t last forever. Maybe until the next election. Then what? Americans who can’t find decent paying jobs will use cheap credit to increase their spending and their debt. Then, when interest rates inevitably rise again, look out. If you think things are bad now, you ain’t seen nothing yet. Pity all those families who are convinced that lower interest rates mean that this is now the perfect time to buy a home. If you think there have been a lot of foreclosures recently, just wait a while and see what happens.
We’ve said this before, and we’ll say it again… If America continues to be flooded with cheap imports that are sucking good paying jobs out of this country, our economy will continue to get worse, no matter how many interest rate cuts the Fed delivers. Can you say “quick fix”?
Wal-Mart might be the biggest employer in America, but they can’t employ all of us. And even if they did, we couldn’t afford to shop there. Minimum wage doesn’t go very far. Especially when you need medical care, and your employer doesn’t provide health coverage.
So thank you, Mr. Bernanke. It was very gracious of you and the Federal Open Market Committee to give America this latest gift. We don’t want to seem ungrateful, but could we exchange the gift for something we really need? Perhaps the creation of good jobs that pay decent wages. Imagine being able to go shopping and actually finding products that say “Made In USA” once again, not to mention having the money to buy those products without going into debt. How quaint.