SEARCH BLOG: FEDERAL RESERVE
There is considerable speculation that the Federal Reserve will lower its funds rate [currently at 5.25%] by one-quarter to one-half of a percentage point. I'm thinking 4.00% is a good target for stabilizing healthy growth and restricting inflation... but I'm not holding my breath.
Given the present slowdown in key housing and jobs statistics, plus the level of foreclosures nationwide, the media are claiming it is a "foregone conclusion" that the Fed will now recognize that the eel has slipped through its fingers.
In its zeal to protect the banking system against inflation, the Fed was willing to overlook the growing structural cracks in the U.S. economy. Now it has to recognize that in many areas, deflation has struck housing values and probably income levels. It's like driving with your brakes on all of the time. Sooner or later you grind to a halt or simply crash.No, the economy is not crashing. But sectors of the economy are... and they will adversely affect the overall economy for awhile.
Interestingly, recent economic statistics have been adjusted downward. When the government reports many of its economic data, the actual numbers are converted to seasonally adjusted annual rates [SAAR]. That means that if August is historically 5% lower than an average month, the August actual numbers are multiplied by 12 [annualized] and then increased by 5% for the normal monthly variation [this is the simplified version].Saturday night, I was listening to talk radio while driving home. The host was having a real hissy fit about Ben Bernanke being a "rookie" and making bad decisions about the funds rate.
However, there is a trend that must be recognized in the statistics. If the trend is downward, then the SAAR is adjusted as well. So what was reported as a higher number early may be adjusted downward [or upward] depending on the statistical trend. This adjustment can go back many months.
That's why you and I might recognize a problem long before government statistics do.
I have been critical of the Federal Reserve actions for some time now [do a simple blog search on "Federal Reserve"], but one needs to realize that the statistical process by which the Fed gets economic data is always subject to revision.You might expect the Fed to try to correct the situation, but don't hold your breath either.
That doesn't mean that the Fed was correct in raising the funds rate to 5.25%... it wasn't. It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
The Fed caused the housing mess by making money too cheap and then caused the housing crash by making money too expensive. But one has to wonder how the Fed really uses the information it has available... and why. The whipsaw effect of Fed actions has to make one wonder.