Thread:

Need economy lesson

Basically if money is "cheap", ie low rates, people will spend it, driving demand up, and prices up.

By raising the cost of money by raising interest rates, people borrow less to buy, keeping demand and prices in check.

The problem is right now the economy is down which requires "cheap" money to stimulate, but there's inflation driven by speculators, globalization, etc.

The dollar has no value right now, especially internationally.

The federal reserve can do several things and its all about increasing the money supply. The more money in the economy the more economic activity. However increasing money supply too much can result in inflation. Inflation can occur on its own independent of money supply issues but the Fed doesn't want to make the problem worse.
Raising rates will "combat" inflation (not necessarily "fix it")

The fed can do several things including:
1) The fed buys and sells debt securities on the open market
2) sets interest rates on overnight loans to banks.

when they lower rates they are making capital more accessible in the economy and that increases the money supply. they want to increase money supply during actual economic downturns (not political ones ) and raise rates in times of inflation.

there is a double edged sword to this. If they increase money supply in times of inflation or there is not actual economic downturn then thats BAD. Also increase the money supply way too much (throught this and other means) can devalue the currency.

Inflation is a VERY BROAD measure of 100 goods and services. (BTW food and energy are only two things so the core is the other 98) The Fed has to look at the entire ecomony as a whole not just two things.
They will look at core inflation because frankly food and energy do NOT make up anywhere near the majority of economic activity. However there is significant energy inflation now and they are worried the energy price inflation will spill over into the other 98 items. If it does spillover we have a big problem.

The current problem is this: supposedly there is low economic activity so the fed cuts rates but there are inflation on the horizon so they may have to raise them. ( I say supposedly because the dollar started fall the same time the current rate cuts started 9/07, that tells me that the market thinks they shouldn't cut rates)

The high energy prices may be the cause of some inflation but if the fed leaves rates lower it will make the situation worse.

This is not an exact science. Its like trying to look into a crystal ball and see what is going to happen. Meanwhile all the Monday morning quarterbacks are doing their thing.

I would hate to be Bernanke.

next lesson Stagflation

ahhh but what the hell do I know

NO... core is historically low (emphasis on historic) Inflation is a "average" of many things. Prices of big ticket industrial items are down thus keeping the "average down" (i.e. core). Services are holding. Food and energy are way up.

However the average doesn't help you and I very much. You and I will never buy a plane or big industrial equipment (prices down) but instead we buy lots of gas, food and beer (prices up) so WE "feel" it more.

also Fed changes don't have an immediate effect and require some time to become effective. And they are trying to give it a nudge. Too much and they overcorrect and vice versa. The switch back will take time, etc. etc. etc.

http://apnews.excite.com/article/200...D9199HEO6.html

Originally Posted by boatsntoys

Hasen't it already spilled over? Seems they are a day late and a dollar short.

The Fed can make a decision in a matter of minutes in an attempt to solve a problem, if it does not work they switch back.

Wish the rest of the Govt. could make a decision that fast with the energy crisis. All these debates and indecision is not helping. Try something, if that doesn't work try something else. Just do something!