The Fed cut rates by an expected .25%, but the stock market expected a .50% rate cut in the Discount Rate. The Fed is rumored to be working to cut that rate more right now due to the plummet of stocks yesterday.
But, should the Fed even be cutting rates right now? Are the rate cuts anything more than bailing out financial markets and trying to appease the markets?
Look at recent history. The main reason we are in this mess is the Fed cut rates to 1%, left them there for a while, and then did not aggressively raise them. This allowed for "credit" to be overly extended and lenders to take on more risky loans.
So, are we to think that things have changed and we, as Americans, will not run out and add more credit, again?
What about inflation? PCE may still be in the "comfort zone", but it is worth noting it ticked higher in the last report. With rates being lowered, inflation is likely to grow freely again.
So, why is the Fed really lowering rates? They continue to mention "inflation risks remain" yet the market acts as if that is not the case. In fact, the markets react more when they don’t get their way, like the .50% cut in the Discount Rate.
It should make you think a little harder about what has changed and what remains the same. Think about it hard and let me know your thoughts.
