Thursday, September 20, 2007

Federal Reserve Action

The Federal Reserve was in a tight spot.

Congress and the Adminstration have given it absolutely no help with fiscal policy, running up deficits of unimaginable size. In the long run, deficits do matter.

Commercial paper was drying up. Only the best, most credit-worthy borrowers could get loans and mortgages.

So, they voted to cut rates - certainly more steeply than I expected. Oil jumped over $80 per barrel; gold shot through $700 per ounce and kept moving. The dollar fell against everything - settling even against the Canadian dollar! Six years ago - a Canadian dollar bought about 68 U.S. cents - now 100. Given the number of commodities that America now must import - wood pulp, copper, oil just to name a few, this creates inflation. So, the agency responsible for holding inflation in check just shook the genie out of the bottle.

They were in a tight spot.

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