Profile picture for Aldreth

FED LOWERS RATE 50 BP

Deserves its own thread. How will this affect the economy? Here is my read.

As soon as they announced this little gem, the 10 year yield went up! That is the complete opposite effect they intended.
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September 18 2007 - US
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Replies (52)

Profile picture for Aldreth
I expect capital flights soon and now with no ammunition, the FED is pointless to stop the train wreck, this was the absolute worst possible thing they could have done. The now have no credibility, real interest rates and inflation are going to skyrocket.
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September 18 2007
Profile picture for klarek the realist
It will be a temporary relief to the housing industry. That's about it. Soften the blow a little bit. Hell, if it helps me sell my place, I'm all for it.
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September 18 2007
Profile picture for joannab3884866
they had to do it......it was the last tool in their closet and large lobbys were breathing down their neck. They also further lowered the discount window by 50 basis points as well.
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September 18 2007
Profile picture for Randy_H
* Real rates will continue to go up.
* The long end of the yield curve will go up.
* Mortgage rates will go up, though they may inch down for a few weeks or even a month or so first.
* LIBOR will become increasingly disconnected from the Fed official rate.

This means the US is losing its nominal-rate setting power. There are only 3 economies in the world with nominal rate power: US, Japan, EU. Every other country in the world sets their nominal rates but is forced to play by the real rates imposed by the rest of the world.

The US traditionally has held enormous power to set our own rates. We are on a path to parity with Japan and the EU where we can only nudge our rates this or that direction, but we must accept the rest of the world's real rates intruding upon our economy to a much larger degree.

The first place most Americans will feel this is in mortgage rates. People will begin calling for another Fed cut when mortgage rates stop cooperating. The Fed will probably do it. But it will again have the opposite reaction and eventually we'll be forced to swallow the bitter pill of too much debt financed too cheaply.

There is good news, however (I'm not a doom & gloomer). The gloomers will disagree with all this, but it's also true:

* The dollar will weaken vis-a-vis the euro.
* The US manufacturing sector will continue to enjoy the growth spurred by a weak dollar policy.
* The US will enjoy paying back foreign debt with cheaper dollars.
* China will keep on buying US dollars, just a few less of them slowly over time.
* The EU will keep on trading expensive euros for cheaper dollars because they won't be willing to give up their manufacturing exports to the US.
* Japan will keep on trading enough yen for cheap dollars for the same reason, plus the fact they don't want every housewife currency FX daytrader in the country taking down the government in the next elections.
* The Middle East will keep choking on ever inflating petrodollars.
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September 18 2007
Profile picture for joannab3884866
"manufacturing sector will continue to enjoy the growth "

.....mmmmmkay.....I hope that you mean excluding the manufacturing of American cars, right? There sure aren't any Ford/GM folks here in the midwest who are enjoying manufacturing life very much right now.
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September 18 2007
Profile picture for lkbryant
so 9/18 has come. now where is the good news about fed lowering mortgage rates we were all waiting for? is the mortgage rate at all time low?
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September 18 2007
Profile picture for Aldreth
"There is good news, however (I'm not a doom & gloomer)"

--Apparently I am, but I agree with everything you said. :P
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September 18 2007
Profile picture for Randy_H
US manufacturing in the automotive sector includes a huge portion of foreign owned domestic production, much of which is even re-exported (but doesn't count on trade balance).

People make the error of thinking about US manufacturing in 1970s terms. It is a different sector today. Highly automated, capital intensive, producing extremely high-value items. The US is by far the largest global exporter weighted by product value, and is actually growing over the past 10 years.

The problem is manufacturing is no longer labor intensive, so the Midwest (where I grew up incidentally) is going through a very long term, tough readjustment.
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September 18 2007
Profile picture for Randy_H
;p

And as for taking issue with manufacturing, I could have answered like this:

Do you think a _stronger_ dollar makes our exports _more_ attractive?
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September 18 2007
Profile picture for Aldreth
"Welcome to the '70s. Hope you enjoy $5/gallon gasoline and $5/gallon milk, 20% inflation in your grocery basket, and everything at Walmart going up in price by 20% - just in time for Christmas."

This should be an interesting ride.
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September 18 2007
Profile picture for lkbryant
doesn't this mean that buyers should buy a home now rather than later? when interest rates have skyrocketed?
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September 18 2007
Profile picture for Randy_H
Pretty soon thieves will be hijacking milk tanker trucks instead of armored cars full of dollars, lol
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September 18 2007
Profile picture for caliguy
Here's how the dollar is holding up to the euro today... http://ichart.finance.yahoo.com/b?s=EURUSD=X

Record low...not good.
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September 18 2007
Profile picture for Aldreth
....
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September 18 2007
Profile picture for CORONA NICK
What are 10yr treasuries? sowwy for my ignorance.
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September 18 2007
Profile picture for aaron20002000
Allright people...my wife & I recently sold our house in california, relocated to tennessee.

We're out of the housing market with little wealth, but a fair amount of income. We don't plan on moving within 3 years.

Should we buy a house, or sit back, rent, & wait for the market to settle out?

If we do rent, what are some other tax deductions that we can employ?, And what are some good hedges against inflation & currency devaluation??
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September 18 2007
LOL Nick, I can never follow Aldreth. That's why I never respond to him. Way over my head. :)
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September 18 2007
Depends on what market/area you are moving into.....
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September 18 2007
Profile picture for aaron20002000
Nashville
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September 18 2007
Profile picture for aaron20002000
what do you think?
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September 18 2007
Bye Bye Dollar.
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September 18 2007
Profile picture for Randy_H
If you rent, and you have little wealth, then you shouldn't do any hedging against currency. Hedging is very expensive; you don't get to do it for free, there's always a premium (in risk or price).

Most people have really no reason to fret about the dollar. Unless you are one of those types who just has to travel to Europe twice a year and eat imported escargot and caviar twice a week then the weak dollar doesn't affect you at all day-to-day net of wage inflation.

You'll be buying a house with dollars some day I assume, so your only concern is protecting your savings from inflation. You can do that with a number of reasonable funds.

And if anyone tells you to run out and buy gold I'd say you should run. Unless you're incredibly lucky or incredibly professional you're guaranteed to lose your arse in gold. Anything you think you see in "where gold will go" has already been priced into the gold market by the ruthless, take no prisoners, commodities traders.
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September 18 2007
I'm with Aldreth...stagflation here we come!
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September 18 2007
All I have been hearing about is that the dollar will get weaker. I am still trying to figure out how someone will eventually profit from this, because someone will benefit more than others.

If I was a European, who had saved up 50K in Euros and the dollar weakens, wouldn't that mean that my Euro can essentially buy more American goods, today than what it would buy me yesterday?

Then the solution for us in America, would be to raise the prices in dollars to match up with the Euro competition. This would essentially not effect the European, because his Euro is still worth the same amount. However, America will pay the difference which will essentially mean that the 4 bucks a gallon will soon go to 5. Basically, if we work the same amount of hours, we will, in essence, be able to buy much less because everything will begin to inflate... So if we want to keep up with the Jones's we will have to put in some overtime...

ooooooorrr..... I could figure out a way to work for a European company overseas via online and get paid in Euros. The same job that was paying me 10Euros an hour yesterday, is still paying me 10 Euros today, except that yesterday those 10 Euros equalled 18 US Dollars and today they are worth 20 bucks. Not bad! A two dollar raise, and I didn't even request it! Now the only mission is to find that online job that pays in Euros. Any ideas?
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September 19 2007
Profile picture for Randy_H
Industry beneficiaries of a weak dollar:

* US manufacturers
* US agriculture
* US located foreign manufacturers that re-export
* US headquartered multinationals that repatriate foreign earnings
* US tourism industry
* US based global financial firms
* US based services exporters
* US based software exporters

Industry losers from a weak dollar:

* European tourism industry
* Domestic oil producers with limited pricing power
* US luxury foreign goods importers
* US mega-retailers relying upon cheap foreign manufactured goods
* US restauranteurs featuring largely imported foods (or using largely imported ingredients)
* US services relying upon heavily offshored outsourced operations

Mostly unaffected:

* US healthcare
* US biotech
* US telecom

What really matteres:

* Buy less French wine; more California wine
* Buy less Belgian beer; more local microbrew "Belgian style" beer
* Buy less Irish whiskey; more Kentucky whiskey
* If you can, set up a fine Jewelery shop in a heavy tourism area that attracts lots of Europeans. They'll all start buying their diamonds and watches here, because luxury jewelery is priced locally (because the market is one giant cartel).
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September 19 2007
Yet again I'm a trendsetter. Washington wines and Elijah Craig Bourbon rather than Scotch. ;-)
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September 19 2007
Profile picture for Justice4U
I fear stagflation if goes unchecked may lead to hyperinflation. The latter is a situation where inflation goes out of control and the currency loses its value.

I did not get a chance yet to read the minutes of yesterday's FED meeting - to understand the direction of its long -term goals but I am pretty sure it mentioned that they would adjust rates accordingly.

So individually, what can we do to protect ourselves? I think we should seek alternative avenue in the accumulation of wealth (since the traditional method - thru the dollar is being compromised).

In my opinion - investing in any of these assets (gold, silver, real estate, gold-backed currencies like Swiss Franc) - would indeed be wise.

If we dont have a hyper-inflation, then investing in those assets will still NOT be be loss as their value cannot be altered much from intervention of supply and demand.

You would argue that real-estate is being devalued now and I would say yes because of Federal Reserve's fiddling of the monetary policy few years ago (loose credit) but you see - over time - price in such asset will correct itself. Is that not tue? Just like how gold and silver suffered huge pullbacks but that does not mean its an unsafe wealth accumulation sanctuary, as eventually it will go to the direction where its suppossed to be.
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September 19 2007
Agree with you, we are in the process of acquiring just under 15 residential units (in non-bubble market) at under market values to hold for five yrs after this mess shakes itself out hopefully we'll be sitting pretty after buying at undervalued price
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September 19 2007
Profile picture for Justice4U
Weak hands will indeed be shaken off as they mostly have used real-estate as a function of medium of exchange (withdrawing of home equity) when its CORRECT function should have been wealth accumulation.

For those who have bought homes for the purpose of living in them - then odds are you will be OK as that purpose translates to wealth accumulation.
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September 19 2007
Well we arent buying them to live in buying them to rent for the five year time span, hoping for moderate appreciation. That coupled with the fact that we purchase at steep discount of app. value....hoping will result in accumulation of equity X 15 untis
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September 19 2007
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