Fed lowers rate quarter point - now at 1%

[spidey07]

wahoo!

http://money.cnn.com/2003/06/25/news/economy/fed_decision/index.htm?cnn=yes

my dumb but wants to take out short term loan and pump it into stock market.

 

[LunarRay]

You could but keep this in mind:

"Though the Fed spent decades battling inflation, and falling prices are certainly good in the short run for consumers, further falling inflation -- or "disinflation," in Fed-speak -- could help set the stage for the nasty economic condition known as deflation.

Japan, the world's second-largest economy, has battled deflation for much of the past decade, with little success. Deflation is an unstoppable drop in prices that hurts corporate profits, leads to more layoffs, which saps demand, hurting prices even further. It's a grim scenario the Fed has said it will do everything in its power to avoid." quote from your link

 

[Tom]

Anyone care to discuss the relationship between the Feds ability to manipulate interest rates versus the upward pressure on interest rates if deficits rise ?

I guess it's a question of timing and balance, any opinions or forecasts for the coming year ?

 

[Corn]

Corn's first rule of investing:

Never invest more in the stock market than you can afford to lose.

If one must borrow unsecured capital to invest, one immediately fails that rule, will most likely not invest wisely, and will ultimately stiff the lender..........

 

[Zebo]

my dumb

you said it.

Now if you built a couple homes I'd say you have a winner

*as long as you don't get sued to much.

 

[Macro2]

They don't get it. All the pumping in the world won't help the economy as long a Real Estate gets all the tax breaks and is the bubble of choice.

 

[sandorski]

I'm no expert, but this cut doesn't make any sense, to me. For the past 20ish years(since I started observing), Interest rates were raised/lowered for 2 reasons:

1) Raise to cool the economy and fight Inflation(De-stimulation)
2) Lower to raise Economic Growth(Stimulation)

The problem at this time, it seems to me, is that Interest rates <5% don't really affect people much. 5% is already hella cheap, if people don't start borrowing at 5ish%, why would they start at 1ish%? Add in the High Debt that most people have and it would seem that the only benefit of practically Free money is in Re-financing of Debt(which could be the real reason?).

Another possibility is that these ridiculously low Rates make Deficit spending much more affordable, but that would take a lot of Political interference, although I'm not sure if the Fed is supposed to be Independent, so it might not be dirty ball.

Yet another possibility might be the continued(new) policy of a low(weaker) $US. As US Interest Rates lower, the $US becomes less attractive to Investors, thus lowering it's value. The advantage of a lower $US is the reduction/elimination of the US Trade Deficit. Though lowering the Trade Deficit eliminates some potential problems, it can create new problems of it's own, especially for the Short-Term.

I don't know what the Fed is trying to accomplish, but as the US economy continues to lag, Canada, the EU, and other economies will begin to suffer(Canadian economy is beginig to slow down) causing those countries to lower their Interest Rates. As they lower theirs, the $US will strengthen eliminating any advantage that a lower $US brings. I think Interest Rates can't go any lower(of course they could, but their lowering will have no benefit).

If those Tax Cuts don't start affecting the Economy soon, I think things are only going to get worse. A good portion, if not all, of the Tax Cuts should have went into Infrastructure Spending, such as Roads, Sewer/Water, or other systems that need upgrading/repair(Federal/State issues notwithstanding). Such spending would have created thousands(perhaps 10s of thousands)of jobs and got the money directly into the Economy where it could do some good, as wells as providing an improved Infrastructure increasing Efficiency.

 

[Drift3r]

Originally posted by: HJD1
You could but keep this in mind:

"Though the Fed spent decades battling inflation, and falling prices are certainly good in the short run for consumers, further falling inflation -- or "disinflation," in Fed-speak -- could help set the stage for the nasty economic condition known as deflation.

Japan, the world's second-largest economy, has battled deflation for much of the past decade, with little success. Deflation is an unstoppable drop in prices that hurts corporate profits, leads to more layoffs, which saps demand, hurting prices even further. It's a grim scenario the Fed has said it will do everything in its power to avoid." quote from your link

Didn't Japan at one time lower rates to 0% and deflation still kept on going despite that ? Of course I am not saying that our economy is like Japan's but it is something to think about if things keep on going the way they are even after the cut.

 

[Brie]

Originally posted by: sandorski
I'm no expert, but this cut doesn't make any sense, to me. For the past 20ish years(since I started observing), Interest rates were raised/lowered for 2 reasons:

1) Raise to cool the economy and fight Inflation(De-stimulation)
2) Lower to raise Economic Growth(Stimulation)

The problem at this time, it seems to me, is that Interest rates <5% don't really affect people much. 5% is already hella cheap, if people don't start borrowing at 5ish%, why would they start at 1ish%? Add in the High Debt that most people have and it would seem that the only benefit of practically Free money is in Re-financing of Debt(which could be the real reason?).

Another possibility is that these ridiculously low Rates make Deficit spending much more affordable, but that would take a lot of Political interference, although I'm not sure if the Fed is supposed to be Independent, so it might not be dirty ball.

Yet another possibility might be the continued(new) policy of a low(weaker) $US. As US Interest Rates lower, the $US becomes less attractive to Investors, thus lowering it's value. The advantage of a lower $US is the reduction/elimination of the US Trade Deficit. Though lowering the Trade Deficit eliminates some potential problems, it can create new problems of it's own, especially for the Short-Term.

When the fed lowers intrest rates it mainly affects banks. The 1% intrest rate is for a specific loan for banks (and i think only for Federal reserve banks). The theory is that the banks will and do fight for the money at lower rates and in turn offer lower borrowing rates for everyone else. Lowering the rate actually makes the US dollar much more attractive since the intrest rate controls the demand rate (lowering = more demand since spending goes up).

Didn't Japan at one time lower rates to 0% and deflation still kept on going despite that ? Of course I am not saying that our economy is like Japan's but it is something to think about if things keep on going the way they are even after the cut

Yes this is possible but our economies are very different in terms of consumer spending... The deflation in Japan was due entirelly to low aggregate demand for a LONG period of time. When their intrest rates were lowered, capital expenderatures did not go up because the consumer demand just wasnt there.

This just means that while the FED does wield great power in terms of economic growth or decline, they arent the only solution. In the late 90's the FED raised rates to control spending and slow growth, but the economy "burst" anyway. In Japan, intrest rates were lowered to stimulate demand but the demand just wasnt there.

 

[spidey07]

So now the demand is there in the US, but everyone is so uptight and conservative that they are not spending?

Lowered consumer activity = lower production = lower employment = conservative consumer spending = spiral down production/consumer spending/employment?

I'm concerned about a "real estate bubble" as well given that is my first choice in investment opportunities as well as personal spending.

 

[LunarRay]

Originally posted by: Drift3r

Originally posted by: HJD1
You could but keep this in mind:

"Though the Fed spent decades battling inflation, and falling prices are certainly good in the short run for consumers, further falling inflation -- or "disinflation," in Fed-speak -- could help set the stage for the nasty economic condition known as deflation.

Japan, the world's second-largest economy, has battled deflation for much of the past decade, with little success. Deflation is an unstoppable drop in prices that hurts corporate profits, leads to more layoffs, which saps demand, hurting prices even further. It's a grim scenario the Fed has said it will do everything in its power to avoid." quote from your link

Didn't Japan at one time lower rates to 0% and deflation still kept on going despite that ? Of course I am not saying that our economy is like Japan's but it is something to think about if things keep on going the way they are even after the cut.

I don't remember the Japan issue re: 0%. I would think, however, that going to 0% would destroy any 'attitude' of recovery... and I wouldn't expect any difference between 1% and 0% in buying habits... (materially)
I see the Fed action as positive but, I would have preferred 50 basis point adjustment. '02 and '03 saw or will see 170- 180 billion in equity (homes) draw and pump into economy. I think the extra 25 basis points may have increased that number much more than the actual change. I think we need another large and properly directed economic stimuli. The debt increase because of this will cause inflation which will also cause immediate purchase of capital assets now... this is needed. I think a small growth will occur if we don't screw up... I wish this were '04 and November... the change alone may cause recovery.
One thing about black holes... once in it you tend to stay in it and only bad things exist there... we are near the event horizon, I feel.

 

[Brie]

Originally posted by: spidey07
So now the demand is there in the US, but everyone is so uptight and conservative that they are not spending?

Lowered consumer activity = lower production = lower employment = conservative consumer spending = spiral down production/consumer spending/employment?

I'm concerned about a "real estate bubble" as well given that is my first choice in investment opportunities as well as personal spending.

Well kind of, we have to remember that corporations are always borrowing money and banks are always giving out loans no matter what the scale (even compared to 1999 its a bunch). If corporations can spend this new money (loans) on projects that are a little riskier but still profitable due to the lower rates, then maybe consumer demand will be simulated due to these new products. In addition when regional banks borrow from the higher ups they can offer lower intrest rates for us. The Fed really dosent influence consumer demand in an immediate way.

Consumers are uptight becasue the economy is in the doldrums and our 401k's are in the drain Demand is always there..if they sold P4 3.2's for 10 bucks you bet i would buy them! The Fed's hope is that the government's money will trickle down (yes trickle down) to the banks - corps - consumers. When Intel takes out loans as it moves down to the 0.09 micron process and makes better faster cheaper chips we as the consumer will probably buy. Its more of a longer term prospect.

BTW In terms of the Stock Market, Since bond rates fall, money flows into the market.

I agree with you about the possibility of a "real estate bubble". In the cycle of the economy, large purchaces such as homes are usually the last thing to dip. I havent seen this dip to the degree of other sectors. Is this because of the lowered rates for morgages or a "bubble" that hasnt burst. I am a little afraid at this prospect.

 

[drewshin]

the biggest problem right now isnt the level of consumer spending, it hasnt been that bad. the biggest problem i see right now is business spending. businesses simply aren't willing to take the risk right now to expand their workforces, hire more people, etc. they just arent confident of the economic outlook for the next year or so. until business spending starts to increase more rapidly, we wont see any growth until then.

 

[Moonbeam]

HJ, do you think there's any chance the government will pay me to borrow money?

 

[LunarRay]

Originally posted by: Moonbeam
HJ, do you think there's any chance the government will pay me to borrow money?

Borrow, spend, borrow, spend, bend!... Borrow, spend, borrow, spend, bend! ...Borrow, spend, borrow, spend, bend! Good think the USSC overturned that Texas law...

 

[Moonbeam]

What about the part where I get paid?

 

[LunarRay]

Originally posted by: Moonbeam
What about the part where I get paid?

You've misspelled again... moonbeam! Prostitution is sick bird... (ill eagle)

 

[Moonbeam]

Not when the government does it.

 

[LunarRay]

Originally posted by: Moonbeam
Not when the government does it.

drop the 'p' add an 'l'... in paid...

We are the government, Maybe we are debating with master debaters.... the government..

 

[JellyBaby]

Big Al continues to make money plentiful and cheap to entice businesses to spend less carefully. Bad timing, though, since many businesses did that in the 90s and wound up learning hard lessons about such things as irrational exuberance and bursting bubbles.

Why should they do so again when the wounds are still relatively fresh? And all the while the value of the dollar declines vs foreign currency. The long term effect is that the U.S. is becoming less wealthy.

I'n no economist but don't you need a stable dollar as a foundation for real economic growth? I think the Fed Reserve needs to stop tinkering so much with the nation's wealth.

 

[Lucky]

The problem at this time, it seems to me, is that Interest rates <5% don't really affect people much. 5% is already hella cheap, if people don't start borrowing at 5ish%, why would they start at 1ish%?

I believe 1% is only the overnight lending rate between banks, not the rate to consumers.

 

[SP33Demon]

"The economy is not in a quagmire! The Dow will rally past levels seen before the bubble, I TRIPLE GUARANTEE YOU! We will beat infidel investors who sell their stocks with our shoes! Even I speak better than the villain Greenspan! This Greenspan, he always depends on a method what I call ... stupid, silly. All I ask is check yourself. Do not in fact repeat his lies to anyone. The stock market has rallied 800 points today, I will even go to Wall Street to prove it! IN ONE HOUR!"

 

[sandorski]

Originally posted by: Lucky

The problem at this time, it seems to me, is that Interest rates <5% don't really affect people much. 5% is already hella cheap, if people don't start borrowing at 5ish%, why would they start at 1ish%?

I believe 1% is only the overnight lending rate between banks, not the rate to consumers.

That is true, however, the basic idea still applies.