Wall Street has been assuming the Fed will cut interest rates at their Sept. 18 meeting. Well, to be more precise, they’ve been foaming at the mouth, screaming for, and demanding a rate cut.
They might not get it. Philly Fed President Charles Plosser in a speech Sept. 8 said it is not the responsibility of the Fed to bail out failing businesses or support troubled markets. Moreover, he did not give the usual disclaimer that he was speaking for himself only.
It is rare for a Fed President to comment so directly on monetary policy… I didn’t see a disclaimer in Plosser’s speech, so we can assume his speech was cleared, and it seems likely that he is speaking for the Fed. I’d take Plosser’s comments as the Fed saying expectations for a Fed funds rate cut in September are probably too high.
(Fade out to wails of anguish and gnashing of teeth emanating from Wall Street)
The Fed’s in an interesting quandry: on the one hand, the sub-prime debacle threatens emplyment, while on the other, inflation threatens the value of the dollar. If it drops rates, inflation worsens, and if it doesn;t, jobs will be lost.
Both problems stem from the Bush administration’s irresponsible economic policies, primarily its enormous deficit spending. A large pool of government debt places great inflationary pressure on the currency. And at the same time, consumers were encouraged to spend on credit in order to stimulate the ailing economy, further straining the available credit supply.
Interest rates are driven by two factors: the Fed’s efforts to control inflation, and supply & demand. Inflation PLUS increased demand equals higher interest rates. And as rates go up, consumers get hosed, can’t pay, and begin to default.
And it’s just beginning. The effects of Bush’s spending spree will be felt long after his presidency is over. Whoever gets elected next will probably bear the brunt of the political fallout, giving the opposing party a significant advantage. (Dems, you may want to think about losing this one!)