30 August 2007

The Fed Guessing Game

Perhaps every person in the world who owns at least a token parcel of TelstraII shares is wondering what is going through the minds of Uncle Ben and his fellow FOMC (or is it the PPT) cohorts. The Wall Street assholes have been screaming for a base rate cut ever since the sub-prime grenade blew up in their faces.

Most sensible commentators not reliant on fee income caution against such a move; more booze for alcoholics is the basic thinking.

Now we learn that the US economy grew at a 4% rate in the last quarter.

The U.S. economy grew at an annual rate of 4 percent in the second quarter, as strong business investment led the fastest pace of expansion since early last year, the government reported Thursday.

The Commerce Department raised its estimate of gross domestic product -- the measure of total goods and services output within U.S. borders -- from a 3.4 percent gain that it published a month ago. That was in line with Wall Street economists' forecasts and far outstripped the first quarter's anemic 0.6 percent rate of expansion.

Admittedly, those figure are for the period before the "credit crunch" and the above article points out that it is not likely to be sustainable, but based on those figures, how can the Fed cut? Other sections of the economy concur that things are just fine and dandy.

I have managed to convince myself that they will cut, caving in to the Wall St assholes, but equally remain convinced that it will be a very bad decision. As many point out, it might not make a hell of a lot of difference, apart from providing for a brief rally. Ultimately, many think we are headed for recession.

If you detect some cognitive dissonance in the above, you are right... mixed messages abound.

So my guess is they cut.


Glen said...

It seems like rather inconsistent data, and it begs the question, "what has been driving the economy if not for the financial, property and consumer sectors?"

I wasn't trading in 2000-01... but the debt/ financials boom seems quite similar, apart from the fact that most of the companies involved in this boom actually make money.

Wayne said...


It all boils down to excessive credit. When, and how that corrects itself will have a big bearing on how the economy copes going forward.

As you know, I happen to think that it won't be pretty.