Pat asks: "I'm curious what the Jayhawk thinks about the Fed's further 50 basis point reduction in the rate. Are we nearing the point of overcompensating? Will cheap cash encourage more irresponsible spending on the part of the American consumer? My vote for the Jayhawk presidency may depend on his answer!"
Given your last statement, I probably shouldn't say anything!
To answer your question directly, I do not believe the Fed's actions will necessarily "encourage more irresponsible spending on the part of the American consumer."
You can't choke the economy, allow high levels of unemployment, and kill economic growth in an effort to teach people how to save. That's like severing a kid's finger every time he or she makes a mistake!
Instead, we need to promote growth and simultaneously educate people on personal finance. Bernanke has blatantly spoken about the latter.
Looking at the ISM Services data point that came in today, we're in deep trouble already. The Fed's job now is to worry about economic growth before inflation. As far as the American consumer and spending goes, it can't be fixed overnight. Over time, though, I believe there are awareness efforts currently in place that will encourage more saving, including the housing correction.
Pat, I think you should hand out flyers at Farragut West that encourage people to save!
2 comments:
Thank you, Jayhawk, for the thorough response! I agree with you fundamentally, I would just question whether a 3.5% fed funds rate was "choking" the economy.
But don't worry, I am still strongly considering voting for the Jayhawk.
It's the perception and the expectations of the financial markets that also matters.
On another note, most so-called frivolous spending that you seem worried about is done on credit cards. Whether the Fed funds rate is 3%, 3.5%, or 5%, it will NOT affect how the American consumer spends on his/her credit card. Credit card rates have astronomical rates - 18%, 25%, 29% amongst other incredible numbers - and *that* in itself should be a deterrent to bad spending habits and debt.
The Fed funds rate is more of a response to stimulate business capital spending which in turn creates employment. I think it's fairly clear at this point that we have a weakening labor market.
Still think the Fed over reacted?
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