Investors waiting on Fed’s interest rate actions

Today the market fluctuated in a narrow range. The crazy news that came out today really didn’t shake it up like I thought it would.

Even Monday’s energy level in the market was kind of a slow day. Tomorrow the Fed is suppose to announce their intentions as far as what they plan to do with interest rates. They have been talking tough about fighting inflation (which they helped cause by their 7 rate cuts in 7 months) by increasing the interest rates again, but most investors don’t believe them. Our Federal Reserve has lost a lot of credibility under the helm of Bernanke and company.

I don’t know what type of market reaction we are going to get but I think whatever he says will get the markets to move in either direction. Fundamentally, current market conditions will continue to get worse with rising energy and food costs, increasing foreclosures and evaporating equity wealth, along with more layoffs and businesses just closing. All the politicians talk a lot of nonsense about what to do but none really seem to have the answer. I think it is because they keep asking the wrong questions and pointing fingers at the other political party. No doubt about it, both the Republican and Democratic Parties deserve blame for sucking at their jobs.

I think first thing the President and Congress need to fix is the gas prices. How did it get so high so fast especially in the last 9 months? It is not increased demand, nor speculators, or lack of domestic drilling. When Bernanke and company cut interest rates 7 times in 7 months, investors foreign and domestic transferred their monies to places where it would hold its value such as oil, metals, other commodities, and other currencies. That is why all of those went through the roof. Investors are not going to keep their money in US Dollars if we keep devaluing it. They will put it in more stable places. That is why demand went through the roof in all those other things.

The federal reserve must know the effects it has on the global economy by the way the currency exchange rates seem to be reacting. I know they do care and are probably worried about the long term problems this will cause. Our budget surpluses and deficits with each country actually change in value when the federal reserve makes these indirect valuation changes. As each country experiences the effects of our rate cuts to their currency, they will naturally react to keep their own economy healthy and stable. And so the domino effect will start. At this point, I don’t think anyone will be able to really forecast how it will play out. All anyone including myself is apply economic theory learned from college and see if it plays out the way they taught us.

What we can observe at this point is the dollar value going down against other currencies (US Dollar Hits New Low Against Euro for 7th Straight Session; Canadian Dollar Hits 31-Yr. High), the price of gold and crude oil hitting shooting up to new highs (The CRB commodities index was far more interesting than the stock market today, even though the index finished the day close to unchanged. Crude oil futures for November delivery were especially volatile today. Crude prices traded as high as $83.76 before running into resistance. They closed the session at $81.39 or nearly 3.0% off their high. Gold prices jumped 1.3% to $749.60 per ounce. Once again, gold perked up as the dollar index (-0.8%) slid to new lows)., and finally a big internet bank was shut down by the FDIC (NetBank Inc., an online bank with $2.5 billion in assets, was shut down by the government on Friday because of an excessive level of mortgage defaults. It was the largest savings and loan failure since the tail end of the industry’s crisis more than 14 years ago. Federal regulators appointed the Federal Deposit Insurance Corp. as a receiver for Alpharetta, Ga.-based NetBank). These are all the after effects of the way the federal reserve has managed rates for the past few years now coming to light.

Bernanke denied there was a housing bubble last year. So when it popped and all the subprime kool aid started to gush out, he panicked and chopped interest rates in an effort to stop the bleeding. Obviously, it didn’t work. The market forces were already so stretched from the last time the federal reserve did that 7 years ago when they actually started the housing bubble, it had to squeeze the excesses out of the market. If Bernanke had let it play out, housing prices would have continued to fall like it is doing now back to reality, but we wouldn’t be dealing with the inflation he has produced. Raising interest rates will not be popular and will definitely not help the housing market to recover any faster, but it will get the price of oil, metals, and commodities down to previous prices before his mucked up decisions. Raising rates will be an unpopular decision, but it will actually help stabilize prices and our economy along with it. Lets see if he has re-read up on his economics lessons from his college days.