Reasons why U.S. rate cut is a Bad Idea

Pin It

Sep 17 2007
Linked In

By far you’ve heard and read why everyone was and is still chanting for the Fed to cut its key rate from the current 5.25% to 5% or even 4.75%, if Bernanke is serious in wanting to make the investors “happy”. The investors are threatening (sort of) to boycott the stock markets by not participating (buy shares or Call options) at all, as can be seen with the low volume. They might increase their pace in selling though – sell shares or Call options (or buy Put options), reasoning that the stocks could not see any reason to be bullish but every reason to be bearish.

The Fed funds rate of 5.25% has been stagnant since June 2006 and Bernanke has been ignoring these market urges (to cut rate) because the other data shows the recession is not to be seen, at least to the Feds chaimain. Due to the overwhelming chanting for the rate-cut, almost every financial analyst predicted the cut is a sure thing to happen on Tuesday 18th Sept 2007. As such Monday is expected to be a very very quiet trading day with almost “ALL” the fund managers staying sideline sipping their coffee or coke waiting for the result. A news portal even calls this week the “mother of all weeks” – a reference to the Tuesday’s FOMC meeting.

So, are there people who actually do not wish to see a rate-cut? You bet and I guess the concept of yin and yang applies to basically everything in this universe. Amongst the reasons why these people do not want Bernanke to cut the rate are:Fed rate cut a Bad Idea

  • It would bail-out the stupids – yes, I know it’s a harsh-word but that’s exactly the word some analysts used. This group of people thinks that since it was the stupid lending companies which lent it to the people with little or no credit histories they have no one to be blamed except them-selves when the credit crunch began in 2007. Warren Buffett actually has the same opinion, though he was short of using the “stupid” word during an interview on Warren Buffett on Housing Crisis and Presidency”.
  • The U.S. economy is not weak – while housing is weak, it’s not across the board as can be seen in states such as California or Florida whereby the real-estate sector is still bullish. Consumer spending is still strong with McDonald’s Corporation reported the August’s sales were up more than 8%. And you simply have to read the multiple new orders for Boeing Company’s (NYSE: BA, stock) planes and its stocks performance.
  • China and India’s economy is too strong – the global economies especially China is still very strong, so much so that the China had just recently raised its interest rate to cool off its economy. As such the strong demand for commodities (coal, oil etc) and finished goods could cushion the relatively weak U.S. economy. It could create potential new issue (funds out-flow) if U.S. cuts its interest rate when the Chinese is busy finding slots to increase its rate.
  • It would increase U.S. inflation problem – already the U.S. dollars had fallen to record low against the euro. A lower interest rate might cause dollars to depreciate further and the purchasing power of U.S. to decline. Higher price of goods will hinder consumer spending due to the potential inflation hikes.

It’s a tough decision for Ben Bernanke to make as he needs to weight from both flip of a coin whether he decides to maintain, cut or even raise the interest rate. They don’t call the Fed Chairman’s position a hot seat for no apparent reason.

Other Articles That May Interest You …

Pin It

FinanceTwitter SignOff
If you enjoyed this post, what shall you do next? Consider:

Like FinanceTwitter Tweet FinanceTwitter Subscribe Newsletter   Leave Comment Share With Others


Add your comment now.

Leave a Reply


(required)(will not be published)