Fed Cuts Rates (Again)

Okay, so if you read my predictions, I was obviously wrong this time. The Federal Reserve cut rates by a half-point, which was more than the quarter-point I expected. I also predicted that, in the face of a quarter-point cut, the stock markets would be down.

Immediately following the half-point cut, the markets spiked up, with the DJIA leaping to 12,681.41 before coming back down to where it was before the announcement.

Small Predictions

Just a couple quick predictions over the next couple of days. The Fed is in the second day of a regularly-scheduled two-day meeting today, and is widely expected to make some additional rate adjustments. In this case, I'm predicting a quarter-point cut as a follow-up to their three-quarter-point cut last week.

My next prediction is that the stock market will drop after this cut, as a quarter-point cut will be seen as the Fed not doing enough to boost the economy and will be a sign that the board is concerned about inflation (I maintain, however, that if they were really concerned about inflation, they wouldn't have cut rates as much as they have).

If any of my predictions turn out to be wrong, I'll come back with an analysis.

Economic Stimulus

The House of Representatives has already passed, and the Senate soon will, an "economic stimulus" package, and that's good news!

Or is it?

The fact is the bulk of this "stimulus" package will not actually do anything to stimulate the economy. In 2001, the last time the government provided "tax relief" in the form of rebates, approximately 75% of the money was put into savings accounts or used to pay debts such as mortgages, car payments, or credit card debts. That money did nothing to stimulate demand for products, and thus did nothing for stimulating the economy.

House Republicans also included $50 billion in provisions to help businesses, many of which should stimulate the economy. Most notably in my mind, a rule allowing businesses to deduct from their taxes 50% of any capital expenditures made this year. That is a provision that many businesses will take advantage of, and the capital expenditures will help drive economic growth, much as they did in the 2001 tax cuts.

Is this time any different? In some ways, yes. While the bulk of the rebate checks will once again be used to pay bills (I'll likely use mine to eliminate some debt), this time doing so will provide some much-needed liquidity to financial institutions already struggling due to the mortgage crisis. It won't do much to stimulate economic growth, but it may help some consumers from getting foreclosed and even help banks from having to lay off employees. If it does, it may help us ease out of recession earlier (assuming we're in one by June).

Plus it will help taxpayers relieve a little bit of debt. If every one of us puts our rebates into paying debt, American consumers will take a big step toward reducing the staggeringly large amounts of debt we all live with on a daily basis, and that's a good thing.

Unless, of course, paying off your credit cards just means you can go rack up new purchases on them.

Can a Credit Card Help You Financially?

A lot of personal finance experts will tell you that using a credit card is among the worst things you can do to yourself financially. The interest rates are exorbitant, and they lead to people spending money they cannot afford. The experts tell you to only spend cash, since that way you cannot spend more money than you have.

But can a credit card actually help you financially, rather than hurt you? If you can manage fiscal discipline, the answer is yes.

Start by establishing a single credit card account, one with no annual fee, a 30-day grace period, and that preferably pays a cash-back award.

Whenever you are out shopping and you want to buy something, use the same fiscal discipline as the people who only pay cash: only buy things for which you have cash on hand. Then, when you get home, go online and transfer the exact amount of the purchase into an interest-bearing account. A high-yield money market savings account would be ideal.

When your monthly credit card statement arrives, transfer the money back out of your interest-bearing account to your checking account and make the payment. Better yet, use an online bill pay feature that lets you transfer your payment directly from the interest bearing account. That way, you can leave the money in the account a few extra days and earn a tiny bit more interest.

In addition to earning the interest on the amount of your payments, you should also be getting a cash-back bonus. If you can manage financial discipline, this is a plan that results in getting interest for using a credit card instead of paying interest.

Fed Cuts Interest Rates 0.75 Percent

The Federal Reserve slashed interest rates by a larger-than-expected three-quarters of a point today, indicating that they are far more concerned about the sluggish economy than they are about inflation. The cuts affect the federal funds rate (now at 3.5 percent), which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, as well as the discount rate (now at 4 percent), which is what it costs banks to borrow directly from the central bank.

What this means is that things will hopefully be a little easier for consumers and businesses in the short-term, which the Fed hopes will increase spending and help the economy stave off a recession (assuming we're not already in one). But it likely also means fuel for inflation, which is already running higher than normal.

Personally, I'm not at all surprised by the move (I had been expecting a cut in the range of a half to three-quarters of a point), just disappointed. I think inflation is going to be a bigger problem for most people than the stagnant economy. The average family of four with a meager income—for whom groceries are a significant portion of their budget—is already struggling with increasing food costs (PDF). These are the people who aren't going to be helped much by cuts in interest rates... those cuts are designed mostly to help businesses, not consumers. But increasing food prices, now, those are going to affect consumers.

I'm worried about that, even if the Fed isn't.

UPDATE: Brian Wingfield of Forbes agrees with me.

Fed Policy

I've read some economic news today that has me puzzled.

First came a (completely unsurprising) report that consumer prices jumped by their largest margin in 17 years, a 4.1 percent rate for 2007. That's a sizeable jump over the 2.5% rate for 2006 and the roughly 2.1 percent rate we've been experiencing on average over the past fifteen years.

Second, I saw a report from the Federal Reserve's Atlanta office that says that the economy is still growing, but very slowly. So the good news is no recession (at least not yet).

But some economists are still expecting—nay, begging for—a large interest rate cut when the Fed meets again at the end of this month. Personally, I also expect the Fed to cut interest rates, as it has become increasinly clear to me that the Fed is far more concerned about slowing growth than about inflation.

Here's the kicker, though: it's not slow economic growth that's hurting people right now. It's the jump in prices. In fact, it could be argued that the jump in prices is causing the economic slow-down, as consumers are cutting discretionary spending in order to be able to pay for food and fuel.

The problem here is that cutting interest rates will spur economic development (whew! good news for businesses!) but cause inflation to grow at an increasing rate, making things even harder for consumers who are already struggling.

Brin Again, This Time on "Fair Tax"

David Brin has written another excellent blog post, this time at his own blog. The topic this time is largely about the proposed "Fair Tax" which has been before Congress every year since 1999 and is currently being espoused by Mike Huckabee.

Brin mostly quotes from John Mauldin (and some others) before going into his own opinions, which agree wtih Mauldin. The rest of the post deals with Brin's dissatisfaction with the way the Republican party has been taken over by the Neo-cons.

While I agree with Mauldin (and, by the transitive property, with Brin) on the Fair Tax issue, I can't say I agree with him on everything else. Then again, I'm not sure it matters.

David Brin on Marxism, Positive Sum Games, and Corporate Oligopoly

Best-selling author David Brin has written a blog entry for the Lifeboat Foundation blog. In his essay, Dr. Brin discusses modern society from an economic standpoint, and how we reached our current state. He also discusses actual Marxism vs. perceptions of Marxism, and why he believes that Karl Marx was the first great science-fiction writer.

The discussion originated from the question of whether we as a society could keep our “modern large-scale capitalist representative democracy cum welfare state cum corporate oligopoly” going, and for how long. While I don't necessarily agree with Dr. Brin's answers, his thought process is intriguing and his writing—as always—is clear and insightful.

Economic Policies of Leading Democratic Candidates

David Leonhardt of the New York Times published an article explaining the policy differences between Hilary Clinton and Barack Obama in economic terms. It's an interesting read.

Basically the difference, Leonhardt says, is that Clinton's policies (like her husband's) tend toward behavioral incentives, and that Obama thinks some people will still ignore the intended behavior even if you incentivise the desired behavior.

I'm looking forward to his follow-up on the policies of the Republican candidates.