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The Federal Reserve today (Dec. 16), essentially admitted it is fighting a depression, not a recession. The central bank dropped the federal funds rate, the interest that banks charge each other, to a range of zero to 1/4th of 1 percent, an all-time low. It had been 1 percent. The stock market had been expecting a 1/2 percent cut. Like drunks on Skid Row reacting to five barrels of wine rolling in from heaven, the stock market rejoiced, as it almost always does when more liquidity is dumped into the system. And the Fed said it will take other steps to pour liquidity into the system beyond the amazingly low rates. Shortly after noon, the Dow Jones Industrial Average was up more than 300 points. Investors were ignoring the meaning of such a radical move: the Fed said that consumer spending, business investment and industrial production have declined and the overall economy has "weakened further." In fact, the consumer price index fell 1.7 percent in November to the lowest level since 1932. The Fed fears deflation, or depression, but won't say it. All this liquidity may create another bubble, but how does one know what kind of a bubble? Stocks? Real estate? If the Fed succeeds in thwarting deflation, very high inflation is almost certain to break out as a result of this liquidity binge.
The Federal Reserve today (Dec. 16), essentially admitted it is fighting a depression, not a recession. The central bank dropped the federal funds rate, the interest that banks charge each other, to a range of zero to 1/4th of 1 percent, an all-time low. It had been 1 percent. The stock market had been expecting a 1/2 percent cut. Like drunks on Skid Row reacting to five barrels of wine rolling in from heaven, the stock market rejoiced, as it almost always does when more liquidity is dumped into the system. And the Fed said it will take other steps to pour liquidity into the system beyond the amazingly low rates. Shortly after noon, the Dow Jones Industrial Average was up more than 300 points. Investors were ignoring the meaning of such a radical move: the Fed said that consumer spending, business investment and industrial production have declined and the overall economy has "weakened further." In fact, the consumer price index fell 1.7 percent in November to the lowest level since 1932. The Fed fears deflation, or depression, but won't say it. All this liquidity may create another bubble, but how does one know what kind of a bubble? Stocks? Real estate? If the Fed succeeds in thwarting deflation, very high inflation is almost certain to break out as a result of this liquidity binge.