Fed Cuts Rates to 2.0%

The cut, the seventh since September, was modest by recent standards, reflecting upward pressure on inflation from higher food and energy prices and the weak dollar. Those trends suggest further rate cuts might do more harm than good in the months ahead...

Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser dissented for a second-straight meeting, this time favoring no change in rates. It's the sixth-straight dissent Fed Chairman Ben Bernanke has faced on a fed funds decision.

"Economic activity remains weak," the Fed said, citing "subdued" spending and a "further" softening in labor markets. Markets "remain under considerable stress," the Fed said.

Barring an unforeseen collapse in the economy or financial markets, rates will probably stay where they are for several months at least, though the Fed left the door open to more cuts if needed...

But the economy still faces many headwinds, and any recovery looks more like a slow "U" than a rapid "V" shape. Housing is unlikely to rebound before 2009 at the earliest, and employment declines -- along with soaring food and gasoline prices -- have weighed on consumer confidence and spending. That leaves exports, aided by the weak dollar, as one of the sole sources of support for the economy.

read the Wall Street Journal article

1st Quarter 2008 0.6% Growth

read the CNN story

My thoughts: Slow growth, but far better than the recession that many had predicted.

Oil and the Dollar

One factor that has sent the dollar down and oil up recently has been the Federal Reserve's months-long round of rate cuts. In an attempt to stimulate the ailing U.S. economy, the central bank has cut rates by three percentage points since September. But the rate cuts are also inflationary, weakening the dollar and sending oil prices higher.

"The weak dollar is a major detriment to the price of oil," said Stephen Schork, publisher of the energy industry newsletter The Schork Report. "It's keeping prices artificially high."

Since this time last year, the dollar has plummeted over 10% against global currencies, and oil has climbed about 80%. As the dollar continues to depreciate in value, investors have bought oil futures as a hedge against inflation.

Also, oil is priced in dollars worldwide, so a falling dollar provides less incentive for oil-exporting countries to increase output, or for foreign consumers to cut back on oil use.

read the CNN story

The Fed's Misguided Policy

The Fed's Bender

So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.

Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease...

Meanwhile, the Fed's decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California...

The practical impact has been to send energy and food prices soaring. This is a direct tax on both the world's poor and America's middle class. Just when the U.S. economy needs a resilient consumer given the fall in housing prices, these price increases have eviscerated consumer pocketbooks. In its attempt to help Wall Street and the financial system, Fed policy is punishing average Americans. The public is frustrated and angry with these price increases, and it has a right to be. Inflation is the thief of the thrifty middle class.

The Fed's problem has been both political and intellectual. Politically, Mr. Bernanke has been unwilling to say no to Wall Street and the Beltway political class, which reflexively demand easier money in a crisis. This demand has become almost Pavlovian since Wall Street came to believe during the late 1990s in what was known, fairly or not, as the "Greenspan put." It takes character to resist this political pressure, but that is what Fed chairmen are supposed to have.

As for the intellectual problem, the Fed and much of Wall Street convinced themselves that the only inflation measure that matters is "core inflation," which excludes food and energy. The Fed's monks devised that measure to avoid an overreaction to commodity price movements, but instead they have used it to pretend that food and energy prices don't matter. Throughout this decade, they pointed to core inflation to argue that "inflationary expectations remain well anchored," even as the dollar and commodity price signals were telling us that the opposite was true. Americans don't buy gas and groceries with "core" dollars...

As the Fed's open-market committee meets this week, what the world wants is a revival of American monetary leadership. It wants the Bernanke Fed to stop the global run on the dollar, and that means declaring an end to its rate-cutting mistake.

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How Different Investments Did Last Week

Inflation: It is a Problem

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Cartoon: Job Market

On-Line EOCT Study Guide

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The Candidates on Trade

Race to the Bottom: The Presidential Candidates' Positions on
Trade by Sallie James

In recent weeks the economy has been in the headlines and in the sights of politicians seeking the presidency. Particularly on the Democratic side, the candidates have sought to paint a picture of a doom-and-gloom economy and a convenient culprit: the trade policies of the Bush administration.

Although Sen. John McCain has largely stuck to his free-trade principles, even when it might have been politically expedient to appeal to voters’ worst instincts, Sens. Hillary Clinton and Barack Obama have entered into a seemingly escalating war of words over the alleged damage done by trade liberalization. As news about the economy worsened and crucial primary contests in industrial states such as Ohio and Pennsylvania approached, the rhetoric reached a nadir.

As voters consider the mix of policy offerings by the candidates, a look at their records on trade during their time in Congress and their statements during the campaign can give some early guidance as to the direction of the next administration’s trade policy. Although trade votes are a necessarily imperfect yardstick with which to measure future policy—packaged as they often are with other, sometimes contradictory, legislation—they seem to be consistent with the campaign pledges of the candidates.

Voters could expect a President Mc-Cain to promote freer trade and cuts in market-distorting subsidies, and a President Clinton or a President Obama to view free trade between voluntary actors as something to be restrained, loaded with conditions, or counterbalanced by an expansion of the welfare state.

read the report

Bush: Economy Not In A Recession

President Bush denied Tuesday that the United States' economy is in recession, calling it instead a "slowdown."

He pointed out that the economy grew in the last quarter of 2007 and that figures are not yet in for the first quarter of 2008. A common rule of thumb says a recession is two consecutive quarters of the gross domestic product shrinking.

But in the United States, an official declaration of a recession is made - often after a recovery has already begun - by a committee from the National Bureau of Economic Research, a private organization.

It defines a recession as "a significant decline in economic activity" over a period of a several months, and takes into account the depth of the decline, not just the duration, according to the NBER's Web site. It also uses a broad array of indicators in addition to the GDP, it says.
The United States has not been in recession since 2001, but many economists expect a recession this year. Some economists have said the United States is already experiencing one, and surveys suggest much of the public agrees.

from CNN

Gas Prices and Government

Economics 101: The Price of Gas
Sterling Terrell

Gas prices are up and oil executives are once again testifying before Congress. Clearly, many politicians, pundits, and consumers lament the rising cost of gas. Before we join them in their chorus, let us take a step back and ask this question: Are gas prices really all that high?

A change in price can be a result of inflation, taxes, changes in supply and demand, or any combination of the three.

First, we need to take into account inflation. The result of the Federal Reserve printing too much money is a loss of purchasing power of the dollar: something that cost $1.00 in 1950 would cost about $8.78 today. As for gas prices, in 1950 the price of gas was approximately 30 cents per gallon. Adjusted for inflation, a gallon of gas today should cost right at $2.64, assuming taxes are the same.

But taxes have not stayed the same. The tax per gallon of gas in 1950 was roughly 1.5% of the price. Today, federal, state, and local taxes account for approximately 20% of gas's posted price. Taking inflation and the increase in taxes into account (assuming no change in supply or demand) the same gallon of gas that cost 30 cents in 1950 should today cost about $3.13.

Neither have supply or demand remained constant. The world economy is growing. China and India are obvious examples. At the same time, Americans continue to love driving SUVs and trucks. As for supply, we are prohibited (whatever the reasons may be) from using many of the known oil reserves in our own country. Furthermore, due to government regulation, the last oil refinery built in the United States was completed in 1976. In addition, the Middle East ispolitically unstable which leads to a risk premium on the world's major source of oil. It is obvious that the demand for oil has grown while supplies have been restricted...

Those who want the government to step in and do something about the high price of gas are either forgetful of recent history or too young to remember the oil crisis of 1979. During that time, restrictions on the price of gasoline led to the inability of some to find gas at all. Price ceilings always lead to shortages. The only thing worse than having to pay "too much" for gas is not being able to find gas at any price.

Let us not be swayed by politicians out for power or by reporters out to create news where none exists. Facts and economic logic should prevail rather than rhetoric.

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Cartoon: Oil Prices

Cartoon: Oil Prices

Withholding Tax Growth

Cartoon: The Cost of War

Cartoon: Health Care Costs

Cartoon: Earth Day

Fortune 1000: the Top Ten

Rank	Company	Revenues ($ millions)	Profits ($ millions)
1	Wal-Mart Stores	378,799.0	12,731.0
2	Exxon Mobil	372,824.0	40,610.0
3	Chevron	210,783.0	18,688.0
4	General Motors	182,347.0	-38,732.0
5	ConocoPhillips	178,558.0	11,891.0
6	General Electric	176,656.0	22,208.0
7	Ford Motor	172,468.0	-2,723.0
8	Citigroup	159,229.0	3,617.0
9	Bank of America Corp.	119,190.0	14,982.0
10	AT&T	118,928.0	11,951.0

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Notice that General Motors and Ford both lost money.

Cartoon: H.M.O.

How Different Investments Did Last Week