Monday, January 28, 2008

The Fed's big 75 point mistake

This article in the Motley Fool is, IMNSHO, spot-on. The Fed's recent 75 point cut in interest rates is a crazy mistake.

Remember that the Fed's job is to tame inflation, not try to correct the economy. The economy simply cannot be corrected by central planning like this -- time has shown again and again that this produces results counter to the effect desired.

What does reducing the interest rate do? It makes the dollar a less attractive investment for foreigners -- who wants to buy dollars when the return is lower? Then basic supply and demand kicks in: a decrease in demand means the price (or exchange rate) goes down. Since a lot of our goods are imported -- including and especially oil -- their prices will go up.

The net result? Stagflation.

No comments: