Time for That Rate Cut
According to the AP today:
As I predicted, we now need an interest rate CUT.
Wall Street fell for a third straight session Wednesday as fresh signs of a housing slump triggered concern the economy is slowing too fast and could erode corporate profits.
As I predicted, we now need an interest rate CUT.
posted by Scribbler de Stebbing | 8/23/2006 12:48:00 PM
Do you think Bernanke overshot? Will he put us into a recession?
The increase in oil prices have to be worth at least 50 bps.
The housing market is true. There are 4 houses for sale in my immediate neighborhood. They are all overpriced and have been on the market for months.
If the Fed had paused between each of the last ten interest rate hikes, we might be about in the right spot today.
But let's see what Bernanke has to say today. (My God, they treat him like Greenspan.)
Houses for sale all over the place here too. Part of this phenomenon is the naivete of homeowners, thinking they're going to continue to see 10% increases when things have gone little more than flat in reality. The old stubborn supply and demand rule is playing a role here in addition to interest rate increases.
If the Fed had raised every other time since it started raising, the Fed funds rate would be about 3% or 3.25% right now.
There is a nagging equation out there called the Fisher equation, named after Irving Fisher.
It reads
i = r + pi
Here, i is the nominal interest rate (the Federal Funds rate), r is the real interest rate (the amount of purchasing power you get back over and above what you lent) and pi is the inflation rate.
Everyone agrees that the Fed, in the long run, can't affect r. The real interest rate is determined by the market. It's hard to argue that its not between 2 and 3 percent (or r is between 2 and 3). Further, most policy makers want at least a little bit of inflation since the prospect of deflation, justified or not, scares them. So they shoot for, say, pi = 2.
Thus you really can't get away from the i, in normal times, being around 4 or 5. i = 3 is a bit lower than can be maintained.
I thought pi = 3.14159. So little I know . . .
The first 10 increases or so were necessary, I agree. But after that, the last 7, could have used a pause between, if for no other reason than to curb investor anxiety. Then we would be somewhere around 4.5 today?
The real problem is that recently, my pi (inflation) has been greater than your pi (3.141592653589).
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