Re: The fed is serious now about reversing its illfound policy of a year ago and persistant negative effect on the economy...
Since the last two FED rate cuts, which added up to a full percentage point, the market has reacted by raising the actual rates paid by borrowers by a quarter point. That's a sign to me that any benefits we're going to see from rate cuts have already happened.
When rates paid by borrowers are rising concurrent with news that interest rate sensitive sectors are falling at an accelerating rate, rather than rising (which is what should be happening at this point in an easing cycle) I get really worried.
The phrase "pushing with a string" traditionally refers to a liquidity trap (no borrowers at any interest rate), rather than the present situation where long term market rates don't drop when the FED lowers the discount rate, but the effect of neutralizing the FED's monetary policy tools is the same. At this point the markets appear to be seeing additional rate cuts as causing inflation without stimulating the economy.
Meanwhile, the fiscal policy "tool" has been used up in a way that increases the demand for investment vehicles, not goods and services. So now that tool cannot be used as fiscal policy to increase the demand for housing and domestic automobiles without creating such a large deficit that interest rates go sky high. At this stage in the economic cycle, we didn't need to encourage investment - there is already overcapacity - we needed to encourage consumption. Payroll taxes should have been cut, not the rates of upper bracket taxpayers.
Something has spooked the credit markets and spooked them badly. I think it was the tax cut, maybe it was something else. Whatever. Until recently, this economy had been doing OK, mainly because construction had been "recession proof". If, as recent numbers indicate, that is now failing, and the other sectors haven't started to recover, we may be in for a really tough time.
Once a spiral starts, it's hard to stop, especially if you wasted your "economic tool set" instead of saving it for when you needed it. |
