Are You Fed Up Yet?

August 31, 2006
By seadmin

Once again, the Fed has screwed up. Yesterday’s release of the Fed minutes revealed that the committee was concerned about the effect that their rate increase campaign is having on the economy. Talk about too little too late. Their exact words: "The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much." Oh no, "the full effect" is just beginning to be felt, and already, it is not at all pretty. The consumer confidence numbers (ironically coming out on the same day as the Fed minutes) clearly show that the Fed’s actions for the last two-plus years have been felt. And it’s early in the game.

Consumer confidence tanked to its lowest level in nine months — or six rate hikes ago — for those of us who are counting. Consumers predictably have closed their wallets because they are worried and well they should be. They are worried about their rising mortgages; they’re worried about higher energy costs; they’re worried about the higher interest payments on their credit cards; and they are worried especially about their jobs. Consumers have started to figure out that they are not safe. Their homes, their jobs and their livelihoods cannot absorb the rate hikes that will slow our economy to a crawl.

The one thing everyone needs to know is: the Fed doesn’t have to be right to get its way! It’s true. We all put our faith and trust in that institution. I’ll give the Fed this: it is really good at maintenance. When the Fed has a good economy, it can string it along and keep everyone fat and happy. But, the Fed is not so good at handling problems. It always overshoots because it just doesn’t know when Americans have too much of a good thing. We have too many rate cuts. Sure, we needed some incentives to restore confidence after 9/11. But, the Fed let housing get completely out of control. Spending really was going nuts. There was too little saving. Last summer, the savings rate went negative — that’s not good. So the Fed got worried and just kept tightening rates. And now, the Fed has gone too far yet again. This crazy cycle of over-easing and over-tightening is wearing down consumers who may begin to realize that they are merely pawns in the Fed’s elaborate chess game.

The chess game is the Fed’s incessant need to look good to its multinational friends. You see, the Fed isn’t in the game to keep us happy. The Fed takes action to make U.S. currency appealing to foreign investors. It’s not about you and me. It’s about keeping the dollar interesting to outsiders. When rates are low and we start to spend too much, it makes our dollar less appealing to foreign investors. When we spend less, foreign investors like our dollars more. That, my friends, is the game the Fed is playing. The game is to keep the dollar interesting to foreign investors.

Quite truthfully, it’s a game the Fed really needs to play well because if it loses, every one of us loses. The Fed fully knows that there will be some casualties along the way. Consider the fallout to be the spoils of war, and all that — including consumers who suffer financially. But to win, the Fed will allow our economy to struggle and possibly to slip into a recession. It’s the only card that the Fed can play. The Fed has gone too far. It knows it. We know it. And, the economy will suffer for it.

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