The Fed and the Economy–Letter to NY Times

 

The one thing about the economy that can be expected is "uncertainty". Your article addresses stronger than anticipated economic growth.
 
One day things are good, the next a totally unexpected report of a negative indicator hits the street.
 
The present controlling underbelly of this economy is the housing bust, and the related liquidity problems.  These will be longer term in nature,and will cause most of us to have a bumpy ride if we are in the market to any extent. As homeowners most of us will just have to ride it out, and it may take 2 to 3 years to restore the solid fundamentals to this market.
 
The question is whether the Fed thinks that the housing and liquidity problems are severe enough to cut the Fed funds rate.   With the core inflation rate under control, for the time being, Bernanke , after reading all the tea leaves,may think that a cut in the rate is still warranted.  If he does this just to appease investors then that would not be in our long term interests. On the other hand, if a cut is thought to be needed to avoid a  more major housing/liquidity bust problem and a recession, then a rate cute should be made.
 
It all depends on how the Fed interprets the complex milieu of economic signals that it is receiving, and getting the timing and motivations right for any such move, or conversely for any decision not to make a change.
 

 

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