Consequences of FED move

Discussion in 'Economics' started by christoffer, Sep 14, 2007.

  1. Hi

    This is a question for those with a good understanding of economics / stock prices.

    I haven't got a lot of understanding on this matter.

    Here is how I see things :

    Ths subprime crisis has shaken the markets quite wildly, and made people in all sectors nervous. When the stock market tanks, the rest of the economy tanks afterwards.

    Consumer confidence is already down due to the submarket crisis, and stock market tanking.

    My question for those who think they have a good understanding of these things :

    If FED cuts the rate, they aknowledge the economy is bad, therefore people gets more frightened, and the market tanks even more. Consumers start to spend less because perception is that the economy will weaken into a recession.
    Therefore we will go into a recession.

    If FED leaves rates, the stock market will tank, because money is too expensive. And the FED isn't aknowledging it.
    When the stock market tanks as a result of the FED leaving rates, consumers spend less, because the economy will weaken, and we will go into a recession.

    I am heavily invested long at the moment in Danish stocks, and my perception of things is of course very subjective, as it will be for most people.

    I hope to get some very good insights from knowledgeable investors.

  2. Do you own a lot of IKEA furniture? Regardless of what the Fed does, consumers aren't going to stop spending. Money isn't expensive. It's cheap relative to what the actual rate of inflation is. If anything, the Fed may want to gradually decrease interest rates between now and next Summer in order to minimize potential problems with adjustable rate mortgages being adjusted upwards. We'll see how that goes.
  3. OP is a prime example ofwhy Economics should be a mandatory course in all high schools.
  4. The Kin2

    In my primary post I apologise for not knowing and clearly state that I would like to hear from people who have a better understanding of things.

    It would be nice to hear both sides of the arguments.

    Your post is just sarcastic.
  5. Chagi


    I don't have much time right now, so I am going to post two brief comments to help you out:

    - you have mixed up cause and effect for much of your original post

    - stock prices are generally speaking representations of future earnings
  6. Thanks a lot Chagi

    I am looking forward to hearing from you
  7. By lowering rates the fed will cause big ticket buyers to wait for more cuts. fed funds futures is predicting rates to be @ 4.5% buy years end.

    Buyers will simply put off that major purchase exacerbating the slowdown.

    The data may change and this predicted slow down may never show up. But we would need the fed to signal a return to a neutral stance.

    I just don't see how a .25% cut is going to stimulate buying, buyers will wait for more.
  8. I think that rules out everybody.

    Remember when Long Term Capital Management failed year 1998? I remember reading they had Nobel Prize winners as executives.

    In the book Greenspan, The Man Behind Money written by Justin Martin page 150 I read about Alan Greenspan and friends starting a money management business aimed at pension funds and large institutional investors. I read that the fund closed down after a little more than a year in operation. Some people might think Alan Greenspan Ph.D. Chairman of the President's Council Of Economic Advisors and future Federal Reserve Board Chairman and friends can successfully and reliably predict future prices of securities. Apparently not.
  9. Here is what should be done........................................................................................................................................................................................................

    NEW YORK (AP) -- A widely watched banking analyst said late Sunday the best solution to the crisis plaguing financial markets is to let cash-strapped borrowers default and their lenders go bankrupt, rather than slashing interest rates.

    Punk Ziegel & Co. analyst Richard X. Bove wrote in a client report the hoped-for cut in interest rates this month will do nothing to bring money back into the U.S. financial markets. Instead, Bove said, lower interest rates will send the dollar into a tailspin and wreak havoc in the job market.

    Many investors believe the Federal Reserve will cut its target for interest rates next week by at least 25 basis points, from the current benchmark 5.25 percent federal funds rate.

    Investors have clamored for Fed Chairman Ben Bernanke to cut rates to stabilize financial markets, which have been in turmoil since July amid decaying credit quality and a flight to safer investments like Treasury bonds.

    Bove cautioned that cutting rates will not lure investors back into troubled markets. Investors and banks already have the cash to buy risky loans and investments, he said.

    "There is no liquidity problem, but a serious crisis of confidence," Bove said. "In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation."

    In fact, cutting interest rates will only encourage investors to borrow dollars at the lower rate and bring the cash to places like Europe, Bove said.

    "It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value," he said. "By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets."

    Bove said the solution to this crisis is to allow people who cannot repay their debts to default and allow the companies that issued bad loans to fail.
  10. If they signal in their statement, more rate cut to come, look out this will surely put off buyers of big ticket items.
    #10     Sep 16, 2007