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  1. #1
    Registered User Mogambo's Avatar
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    fed cuts rate .... but says economy is healthy

    I'm not an expert on this but everything that I've heard and read about the FRB's moves seems contradictory. On one hand they undertake moves that are usually enacted when the economy is not doing well but than their comments are all positive about its current state. Even the news analysts were questioning some of the specific things mentioned by Powell are only done so when there is great cause for concern vis-a-vis the economy's health. Market liquidity is one of those things he mentioned.

    The cut wasn't much. Not sure what it's supposed to accomplish and neither, it seems, do the 'experts.'

    Cutting interest rates increases debt right?
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    Registered User Cartiac's Avatar
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    I think a lot of people including the president agree with you on questioning if the fed has any clue about what they are doing. They were very eager to freefall interest rates and print new money to prop up the economy during Obama's administration and then for absolutely no good reason start aggressively jacking them up as soon as the economy started accelerating under Trump despite no sign of increased inflation to justify the increase and in a world environment where other nations are at negative interest rates.

    Even with the president telling them exactly what they should do which sets the market expectation. The fed then repeatedly fails to follow their own words about not needing a cut with a tiny cut followed by contradictory statements about not cutting. They need to either listen to the president and make the significant cuts he is asking for or stick to their own words that cuts are not needed. They keep trying to prove how non political they are by making completely useless political moves straddling both sides.
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    Inflation is 1.5%, half a percent below the target so in a good range.

    This would suggest a rate cut wasn’t necessary, but global trade headwinds and uncertainty (ie, politics) are what led to a cut.

    Am I thinking about this correctly?
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    Macroeconomics can be quite complicated in how all things in the world markets are intertwined. Technically speaking, lowering interest rates does not increase debt, it only decreases the price of money. But yes, The Fed correlates that cheaper money = more borrowing = higher inflation = higher growth as people and companies take on loans to fund whatever they want buy. In the past interest rates have been cut after the economy has already started deteriorating in order spur spending and re-ignite growth. So why now when the market is at an all time high?

    The Fed is famous for over-tightening us at the end of business cycles as they try to keep inflation from getting out of hand. Back at the end of 2018 you had that big sell-off as J Powell kept signaling to the market that interest rates would continue their upward trajectory into the immediate future. The market, being the projection and consciousness of the world economy, freaked out causing a massive sell-off. The bond market had already sniffed out the economy slowing down months before which is why you didn't see bond yields rising (if they thought inflation was coming it would have been the opposite) The freak-out caused one of the biggest flip-flops in Fed history as J Powell went from Hawkish (raising interest rate bias) to Dovish (lowering interest rate bias) literally in a few months time.

    You can't turn the economy around on a dime, its like a big barge that The Fed steers with their monetary policy (interest rates). Overtightening will cause a ripple effect to which you only see the effects further down the line. We're talking many months/year lag. So the bond market kept pushing bond yields down inverting the yield curve (aka they sense recession) and the trade war intensified. Combined with crappy world macro numbers (all economies are interconnected nowadays), the Fed must now get ahead of things and cut while the market is high to prevent damage down the line. We will see if they are too late or what is in motion will stay in motion.

    There's a lot more to it but that is a simplistic look at it.
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    Originally Posted by Cartiac View Post
    I think a lot of people including the president agree with you on questioning if the fed has any clue about what they are doing. They were very eager to freefall interest rates and print new money to prop up the economy during Obama's administration and then for absolutely no good reason start aggressively jacking them up as soon as the economy started accelerating under Trump despite no sign of increased inflation to justify the increase and in a world environment where other nations are at negative interest rates.

    Even with the president telling them exactly what they should do which sets the market expectation. The fed then repeatedly fails to follow their own words about not needing a cut with a tiny cut followed by contradictory statements about not cutting. They need to either listen to the president and make the significant cuts he is asking for or stick to their own words that cuts are not needed. They keep trying to prove how non political they are by making completely useless political moves straddling both sides.
    I agree with your whole post. Imo they should cut to keep up with Europe and what heyre doing, must stay competitive.
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    test the limits RobParks2M's Avatar
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    Originally Posted by Mogambo View Post
    I'm not an expert on this but everything that I've heard and read about the FRB's moves seems contradictory. On one hand they undertake moves that are usually enacted when the economy is not doing well but than their comments are all positive about its current state. Even the news analysts were questioning some of the specific things mentioned by Powell are only done so when there is great cause for concern vis-a-vis the economy's health. Market liquidity is one of those things he mentioned.

    The cut wasn't much. Not sure what it's supposed to accomplish and neither, it seems, do the 'experts.'

    Cutting interest rates increases debt right?
    Actually interest rate cuts keep interest on national debt lower from what I've read (which could be wrong) making it more serviceable.

    Compared to global economic policy US has tightened significantly more. There are quite a few places with negative rates still. In Denmark for example some people are getting paid to take out mortgages. This policy is essentially going to hyper inflate asset prices as it punishes people for holding money in banks. Not sure exactly how or when this policy is ever going to get unwound quite frankly. Hopefully US goes back to tightening sooner than later, but who knows.
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    Registered User A-man's Avatar
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    I think it was a bad move to cut. Normally raising rates during the expansion is a good idea to temper runaway inflation and keep the economy in a “sweet spot”.

    Problem is we are not in a “normal” cycle because the last downturn was deeper than normal, and rates were dropped way too low for way too long. They need to rise to prevent over borrowing and excess asset inflation. Low rates for too long damages the economy, just look at everyone’s debt levels (individuals, corps, government etc.)

    Dropping them after Trump complained wasn’t the right move. It made the Fed appear partisan, when they should be independent. It was also premature in this weak tightening cycle. Our only hope is that they continue to tighten after this temporary pause IMO.
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  8. #8
    Registered User Mogambo's Avatar
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    Finally got around to reading the responses ITT. Some dense stuff for my moderately finance informed mind.

    Originally Posted by CLEAN_SET_OF_10 View Post
    Inflation is 1.5%, half a percent below the target so in a good range.

    This would suggest a rate cut wasn’t necessary, but global trade headwinds and uncertainty (ie, politics) are what led to a cut.

    Am I thinking about this correctly?
    What concerns me, as a conservative saver, is that the inflation warning has been talked about for the better part of the last several years. What I've come to understand is that the inflation rate is too low for the Fed's liking. OTOH business analysts always seems to be signaling that an inflation spike is imminent. What seems to have prevented that is that the USD is the backbone of the world's economy. Everyone trusts it and flock to it in times like now when you have global uncertainty vis-a-vis trade and nationalist policies.

    Originally Posted by knightofday View Post
    I agree with your whole post. Imo they should cut to keep up with Europe and what heyre doing, must stay competitive.
    Keep up as in follow suit with what European nation's are doing with their banking/interest rate policies? That doesn't make sense considering the US's economy is not in the same position as those countries. Consumer confidence has been strong considering all the negative news surrounding trade talks. Consumer spending is strong. Hell I believe credit card debt is hitting all time highs right now. So what's the point of punishing people like me, heavy holdings in savings accounts, to try and pump more money into the economy?
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