In keeping with short-standing tradition, I will predict that the Fed moves both rates 50 bps lower today. This is not because the have to. The 175 bps of moves over the past four months has yet to hit the economy. However, since Mr. Bernanke seems to be front-loading rate cuts in a, to paraphrase Admiral Farragut damn the inflation, lower rates ahead, fashion, another 50bps today seems logical. But where do they go from here?
Today, we also got the first look at 2007 Q4 GDP, which came in at +0.6% annualized. While not great, it is still a positive number. This figure is subject to revisions, but it is likely to stay positive. I don't think the US goes into technical recession. If it was going to start, Q4 would have been the time. However, what hasn't been talked about much is the difference between the two quarters. Moving from 4.9% to 0.6% is quite a drop. It makes people think, from an anecdotal standpoint, that activity is slowing much more than it is. Much of the slowness comes from housing, whose construction levels two years ago were much higher than sustainable levels. Everyone should keep that in mind when predicting doom and gloom.
Given all of the uncertainty out there, it is quite remarkable that the economic condition is worse than it is. Aside from all of the economic news buffeting the markets and the economy, there is a wide open race for the the President (and Congress too, which gets overshadowed) and the threat of tax increases out there after 2010 (the rollback of the so-called Bush tax cuts). Solving this tax situation alone, one way or the other (hopefully the correct way!), would do more than handing everyone a check (stimulus package) and go a long way to improving the markets and the economy as a whole.
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The genration which came of age in the 1970s has been described as he "Me Generation". The current cast if characters should be called the "Waah! Generation". Lose at sports? Waah change the rules! Do poorly in school? Waah chnage the grading system! Don't get promoted at work? Waah, the boss hates me or my group. Call HR!! bBought too much house with a mortgage which one could never pay? Waah bail me out! Madd bad bets on sunprime? Waah give me liquidity! The stock market is falling? Waah cut rates, I can't take a loss!
The Fed is acting like a bad parent of a spoiled child. THis reminds me somewhat of Arthur Burns and that 70s Fed (ooh, I like teh sound of that). The Fed chose growth over inflation (to avoid having to face economc reality) and ended up with little growth and much inflation.
As for the stimulus, a one time check may or may not get spent. It is a one time event and not a long-term cure. Lower taxes and keep them low could encourage consumers to consume. Of course, the critcis would then harp on the low U.S. savings rate.
I like the comment on the savings rate
Can't have your cake and eat it too.
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