Tuesday, August 10, 2004
Fed raises interest rates again
The Federal Reserve's Open Market Committee (FOMC) just raised the federal funds rate another 1/4%, to a still historically low 1.5%. It is the second such rise this year. They're trying to forestall inflation, but in such a fragile, barely-there, job-growth-free recovery, the risk is that any tightening of the money supply will shut down what little growth there is. Inflation has been running at about 0.5%/month (much higher than during most of the last 20 years), mostly due to spiking energy costs. While those costs are probably near their highs now, they're unlikely to decline anytime soon - there's not a lot of excess capacity at the wellheads, and with the winter heating season coming, gasoline's probably not going to come down much more.
The way to ameliorate this energy-cost inflation in the short-to-medium term is to stabilize Iraq and get their wells back on-line - but the Bush administration is showing no capacity to do that. The other 900-lb gorilla in the room is the weak-dollar policy that Treasury has been pursuing for the last couple of years - the euro and the yen are much stronger than the dollar right now, so imported goods are getting more expensive. In the old days that would spur American companies to cut costs, but these days they're more likely just to move more jobs offshore and concentrate on developing their Asian and European markets. One thing that keeps me awake nights is worrying about if (or maybe that's when) a major oil-producer decides to price in euros instead of dollars. When that happens, our economy will find itself in some very deep, very smelly, shit.
The FOMC meets one more time before the election, in early October. It'll be interesting to see what the economy does between now and then, and how Greenspan deals with it on the eve of the election.
The way to ameliorate this energy-cost inflation in the short-to-medium term is to stabilize Iraq and get their wells back on-line - but the Bush administration is showing no capacity to do that. The other 900-lb gorilla in the room is the weak-dollar policy that Treasury has been pursuing for the last couple of years - the euro and the yen are much stronger than the dollar right now, so imported goods are getting more expensive. In the old days that would spur American companies to cut costs, but these days they're more likely just to move more jobs offshore and concentrate on developing their Asian and European markets. One thing that keeps me awake nights is worrying about if (or maybe that's when) a major oil-producer decides to price in euros instead of dollars. When that happens, our economy will find itself in some very deep, very smelly, shit.
The FOMC meets one more time before the election, in early October. It'll be interesting to see what the economy does between now and then, and how Greenspan deals with it on the eve of the election.
