Fed Chairman Bernenke didn't make a good first impression. He seemed to react quickly to stock market downturns in reducing rates rather than taking the more measured "wait and see" attitude of the Greenspan years. This lead to a perception that Bernenke was out of his league. Now, it may turn out that Ben Bernenke made exactly the right moves at the right times.
The country was and is experiencing a credit crunch. People and businesses are having a tough time finding capital. Bernenke's swift move to add liquidity to the marketplace and bring down interest rates despite a falling dollar may make this one of the shortest and shallowist economic downturns in recent history.
Housing slumps are always followed by a rebound, led first by bargain hunters. This normally takes quite some time as interest rates gradually come down and the economy slowly strengthens. This time around interest rates have come down fast and many are of a mind that they can't go much lower. The bargain hunters may enter the game very early in the cycle. At the same time, refinancing is bouying the mortgage broker market, where many individuals got hit hard.
On the world stage the dollar may be poised for a big comeback as the US has gotten ahead of the curve and is taking steps to avert a recession well before one sets in. Europe's delay may mean they'll be cutting rates and looking for answers while our economy is entering a new phase of growth.
The jury's still out on Bernenke's policies, but in this fast-paced market place, a fast-paced Fed chairman may be just what the doctor ordered.
Showing posts with label Fed Rate Cut. Show all posts
Showing posts with label Fed Rate Cut. Show all posts
Tuesday, January 29, 2008
Tuesday, January 22, 2008
The Great American Garage Sale - Playing the Crash
The Fed cut rates, in intermeeting move today by 75 basis points for the first time since 1984. Congress and the administration are actually in agreement on the need for a stimulus package. This has lead traders to wonder, "what do they know that we don't?" This has actually caused more panic and selling in the market. How should one repond to these circumstances? Time to go shopping.
This is the most opportune point of the market cycle. When almost everyone agrees that the economy is heading for a train wreck. Goods, services, commodities get cheap and nobody's buying. I would not recommend putting all your money to work in one fell swoop, but if you've got some saved up for a rainy day....it's raining.
In the stock market, start dollar cost averaging into it. That is, purchase the same amount of a broad basket of stocks (exchange traded index funds) each month or every couple of months. In real estate, start looking for bargains and pick one up when you have the opportunity. Spend the next year or so refurbishing and getting ready for the turn in the market. In business, rent a store room and start picking up equipment on the cheap. For consumers, spend your money productively on home repairs, landscaping improvements, etc. Start visiting pawn shops, thrift stores and flea markets on occasion. Good stuff is about to show up there. Use downtime to gain education in something you're interested in. There's free education all over the internet. Go get some.
The train is in the station. Don't wait for it to start to pull out and join the clamor to get on. Find yourself a good seat now and enjoy a good book while anticipating the next leg of the journey.
This is the most opportune point of the market cycle. When almost everyone agrees that the economy is heading for a train wreck. Goods, services, commodities get cheap and nobody's buying. I would not recommend putting all your money to work in one fell swoop, but if you've got some saved up for a rainy day....it's raining.
In the stock market, start dollar cost averaging into it. That is, purchase the same amount of a broad basket of stocks (exchange traded index funds) each month or every couple of months. In real estate, start looking for bargains and pick one up when you have the opportunity. Spend the next year or so refurbishing and getting ready for the turn in the market. In business, rent a store room and start picking up equipment on the cheap. For consumers, spend your money productively on home repairs, landscaping improvements, etc. Start visiting pawn shops, thrift stores and flea markets on occasion. Good stuff is about to show up there. Use downtime to gain education in something you're interested in. There's free education all over the internet. Go get some.
The train is in the station. Don't wait for it to start to pull out and join the clamor to get on. Find yourself a good seat now and enjoy a good book while anticipating the next leg of the journey.
Tuesday, December 11, 2007
Fed Rate Cut, A Layman's Guide to Fed Policy
The Federal Reserve Board will announce today whether or not they will reduce the rate which they charge banks to borrow money overnight. This is always a highly anticipated announcement and guessing what the Fed will do and when has become an industry unto itself. What's all the fuss about? Here's the simplified version:
Cash is a product, like any other. It's an "avatar" for wealth. A tool for facilitating wealth and asset transfer. A substitute for direct barter. Banks "sell" cash to customers, who pay them back with more cash (loan plus interest). The banks get their inventory (cash) from customers who deposit money with them. Banks are not allowed to lend out all of their inventory. They have to keep a certain percentage on hand to cover withdrawal requests. When the bank's inventory of cash falls below required levels, the bank borrows money from the Federal Reserve overnight to cover the shortfall.
When banks are faced with increasing slow pays and defaults, the amount they must borrow overnight increases. This causes costs to go up, which are passed on to consumers down the line. This is why the Fed's overnight lending rate is so closely watched and why it can be a useful tool in affecting spending behavior, at least short term. When the Fed lowers the rate, banks can afford to cover more shortfalls for longer periods of time and aren't under as much pressure to raise their lending rates or take aggressive collection action.
When the Fed raises overnight rates, banks will often raise their own rates and/or tighten credit requirements to ensure a higher percentage of on-time payments.
Cash is a product, like any other. It's an "avatar" for wealth. A tool for facilitating wealth and asset transfer. A substitute for direct barter. Banks "sell" cash to customers, who pay them back with more cash (loan plus interest). The banks get their inventory (cash) from customers who deposit money with them. Banks are not allowed to lend out all of their inventory. They have to keep a certain percentage on hand to cover withdrawal requests. When the bank's inventory of cash falls below required levels, the bank borrows money from the Federal Reserve overnight to cover the shortfall.
When banks are faced with increasing slow pays and defaults, the amount they must borrow overnight increases. This causes costs to go up, which are passed on to consumers down the line. This is why the Fed's overnight lending rate is so closely watched and why it can be a useful tool in affecting spending behavior, at least short term. When the Fed lowers the rate, banks can afford to cover more shortfalls for longer periods of time and aren't under as much pressure to raise their lending rates or take aggressive collection action.
When the Fed raises overnight rates, banks will often raise their own rates and/or tighten credit requirements to ensure a higher percentage of on-time payments.
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