Federal Reserve & Interest Rates

Looking back on the month September, there are some positive points. The Stock market performed at sky high rates. Investors and traders were able to benefit greatly from their shares. Portfolios are improving all over, and Wall Street has plenty of smiling faces, for now.

The moves by the Federal Open Market Committee to reduce the discount rate and federal funds rate proved to be of great assistance to the stock market. Ten consecutive trading sessions maintained an incredible high.

With all the news of the housing market continuing to do poorly, the lack of control on the inflation issue, and the lurking fear of a possible recession, it is good to hear that something is going well for the economy. Market performance doesn’t mean that all of the other problems will go away, but at least the country’s economy is not failing on all fronts.

The Federal Open Market Committee has another meeting at the end of this month. Some investors are speculating that there will be another cut in the rates. This seems unlikely to economists since the market performance has done extremely well recently. The moves by the Federal Open Market Committee eased the fears of investors everywhere, and it perhaps spoiled them. The economy was facing, and probably is still facing recession. The markets were slipping, the dollar is depreciating, and something just had to be done. Stabilizing the markets was a quick fix to pending problems.

The move by the Fed could very well have been a band-aid solution for the deeper economic problems that our country is facing right now. It at least calmed down Wall Street, and keep the economy from totally going under, for now. It was perhaps a move made to postpone recession, avoid a serious market crash, and buy some time to come up with another plan. Deeper problems have to be addressed.

Will there be another rate cute at the end of this month? Chances are that there will not be. The markets are performing rather steady at this point, so an emergency cut will probably not be needed again. What will the Federal Open Market Committee do, then? The next main issues are employment and inflation, not necessarily in that order. The unemployment rates in the housing sector are, obviously, suffering the worst job cuts. There is only so much that can be done about employment and inflation. It will probably be more difficult to deal with inflation for a long time, considering the falling value of the dollar.

The value of the dollar has been decreasing consistently in recent weeks. The Euro has hit an all time high against the dollar, and the Canadian currency is head to head with ours. There is also news that the Israeli shekel is gaining in value against the dollar as well.

Is there a positive side to this plummet in the value of a dollar?

When I heard about the deep dip that the dollar has been taking, I thought about imports. If our exchange rate is now worth even less than it was two months ago, wouldn’t that raise prices for us? We rely on imports from Japan, other parts of Asia and Europe for numerous manufactured goods and technology, not to mention automobiles. The weakness of the dollar in foreign exchange seems to be a negative for the economy. With the exchange rate low, it is likely that the cost of imports will inflate, which would in turn raise prices for consumers.

That side of things looks detrimental to our economic growth, but, exports are a different story. There is some speculation that we could benefit from this plummet in the dollar’s value. If the dollar has decreased in value, and foreign currency has gained value, then it would be beneficial to those countries to buy more from the United States. There is some prediction that the increase in demand for U.S. labor, goods, and services will increase. There is no way to tell for certain that this will offset the increased cost of imports, but at least the situation isn’t entirely negative.

While there is no guarantee that the demand for U.S. exports will rise to alleviate the import cost increases, it should help keep inflation from taking too sharp of an incline. The increase in export demands could at least cushion the blow or the rising Euro.

If there is a way to decrease U.S. demand for imports, we could pull through this season will some slow growth. If we can’t reduce import demand, the export demand increase may have little or no effect. Inflation has already been a major concern for the Federal Reserve particularly for the first half of this year. While there we interest rate cuts made recently, inflation remains an unresolved issue.

We will soon find out how things balance out in the Foreign Exchange market. If it doesn’t fair well, we will probably see it in inflation. Hopefully exports can neutralize the problem of the weak dollar.