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Righting the Economic Ship?

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Micromanagement by the Fed in response to every economic ill just creates bigger and bigger bubbles until it all blows sky high.

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Well, the Fed made its choice and anyone who thought the Fed cared about the U.S. dollar found out otherwise. The U.S. dollar fell to a record low against the Euro, gold is breaking out to a 27-year high and oil is at another new high as well, up 33% or so on the year.

Click here to read the full FOMC statement, the beginning of which is shown below.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Obviously the Fed is a lot more worried than it is letting on. This is yet another panic move by Bernanke. The first panic move was a cut in the discount rate 50 basis points (See Futures Fireworks and Moral Hazards). And more panic moves can be expected when the economy does not respond to these cuts. The stock market may be excited today but the bond market was unimpressed to say the least.

Curve Watchers Anonymous is back watching the Yield Curve.


Click here to enlarge.


Once again the pivot point is the 5-year treasury and there is a selloff on the long end and a rally on the short end.

I was listening to Bloomberg and one of the homebuilders, Toll Brothers (TOL), said "Our boy has righted the ship". The above yield curve shows how little this cut is going to matter to anyone in a mortgage tied to the 10 year treasury. There is a possibility of a revolt on the long end, and/or mortgage rates will continue to disconnect from treasuries as they have done now for quite some time.

NAHB Wells Fargo Housing Market Index

Click here to enlarge.

The traffic of perspective buyers sits at 16 and the overall index at 20. Anything under 50 shows contraction.

Bank of America (BAC) and Wells Fargo (WFC) both lowered their prime rate to 7.75% from 8.25%. In other words, they have given up 100% of benefit of the drop in rates by passing it all on. But how many qualify for the prime rate, and more to the point who really wants to borrow in a clearly slowing economy unless they have to?

It's going to take a lot more than 50 basis points to "right the ship". And the ship I am talking about is the economy, not just homebuilders. Besides, the medicine is wrong. It was panic moves by Greenspan (with Bernanke voting with Greenspan every time), that created the credit bubble. Panic moves to lower interest rates can hardly be the cure. Bernanke has proven the inability to distinguish problem from solution. I talked about this in Bernanke Proves he is a Complete Fool.

Micromanagement by the Fed in response to every economic ill just creates bigger and bigger bubbles until it all blows sky high. It's high time to abolish the Fed and give the free market a chance.

No positions in stocks mentioned.
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