The Fed's Kitchen Sink Interest Rate Policy

The Fed announced their policy of establishing "a target range for the federal funds rate of 0 to 1/4 percent."

This brings two points to mind:

1.) The Fed has no interest rate moves left. This is it.

2.) The Fed is terrified about the economy. And they have good reason:

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Let's look at the charts:

Employment has taken a nosedive. As a result:

People have cut way back on their spending. As a result:

Industrial production is dropping and so is:

Capacity Utilization -- the amount we are using of our manufacturing capacity.

More to the point, the Fed will step up their other activities:

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

To the point: the Fed is scared right now. I mean really scared. And they will do anything even remotely possible right now.

Comments

[marinara]

The federal reserve will lower interest rates until everyone is without cash and finished. Lower interest rates merely allow greater leverage to economic contraction. This in fact deepens the recession.

It's obvious. The FED is financing the contraction. No good can come of this as the FED squeezes life out of the dollar. This will result in greater income disparity and greater centralization of wealth.

[Think2Much]

Praedor you have nailed several salient points on consumption vs saving, exec pay vs worker pay, shipping jobs to other countries vs making things here. What to do?
$ave anyway...better yet, pay off all debt first. Quit $pending and learn the meaning of the word "enough". How many pairs of shoes, lipstix, cd's, laptops, etc. are enough? I would suggest that if half the products were removed from store shelves, we'd never miss them!
The USA constitutes about 5% of the world's population yet we consume (such an appropriate word) roughly 30% of the world's resources! That is simply not sustainable or even sane.
Invest in yourself first BEFORE investing in "financial instruments" (of mass implosion). Education. Travel. Helping others. Start your business. Invest in small businesses of people you actually know. Experience cannot be stolen, needs no insurance, cannot be replaced and does not depreciate.
Vote with your money - buy only USA made items and preferably those close to where you live! If only 10% of us did so, we would start making things again.
When and where appropriate - DEMONSTRATE! Write. Blog. March. Email. Run for office. If you own stocks or mutual funds make lots of noise about CEO pay...where sensible trade on-line.
Having been to more than one funeral; in death you will not be remembered by the money or possessions you aquired...but by how well you loved those in your life.

[lvdragonlady]

What they need to do is force the banks to lower the interest rates on credit cards. Doing this would help the economy more then dropping the interest of loans between financial institutions.
They have got to start helping the people INSTEAD of the corporations that are scr***ing the people.

No, I do not have any credit cards. I got rid of mine 7 years ago.

[ddanaan]

A secondary effect of purposely inflating the money supply to pay for infrastructural investment is that it will de-value the money the banks have and are not loaning out and that people who have funds to invest are holding back. When keeping your funds "safe" costs more than risking them there is an incentive to invest and spend. (Unfortunately ther is also an incentive to transfer the money to non-inflating currency and gold.)

[Praedor]

What truly sucks: We are told to save because Americans "just don't save" but if we save, we are told that we aren't consuming enough and need to spend spend spend to keep the economy going.

The economists, at least those that work in/with the federal government also bemoan any increase in worker wages as "inflationary" and "baaaad" but are more than happy to see CEOs and the like of do-nothings make ever-larger sums with no limit. They also then get all schizo and MIGHT talk about wage stagnation or the reduction in real wages vs the past but, by god, nothing must be done about this (increase worker wages/compensation) because that would be inflationary!

Criminal wages for the already rich: good and necessary. Increasing wages for workers: bad and evil, to be fought tooth and nail.

Savings: needed. Savings: bad because that means you aren't spending spending spending to keep the consumption economy going.

In short, I actually hope for worse to come. I want the entire system, along with its Chicago-school assumptions to die the death it deserves. The economy needs to lose the Chicago monsters and build a more equitable and egalitarian system that eschews 'winner take all' or ever-widening wealth disparity between a tiny 2% and the remaining 98%.

[dobberdoss]

Totally agree and it's nice to see people like you seeing the system for what it is, thanks for restoring my faith.

[Overd0g]

That's better than being denial. But while they can't lower interest rates more, they do have many other actions they can take.

[peterg76]

Excellent observation. It seems the more obvious the severity of the situation becomes, the more rare clear explanations become.

[blackspeak]

Madman Madoff's scandal sure as hell didn't help matters...

[pup sydney]

We are a nation of consumerists with no money = we go down. Seems pretty clear to me. I don't need theories of economics, anti central bank rants etc. We spend like drunks using credit cards, buy homes with teaser rates, accept wall street sheananigans and start wars at will : DUH? What do you expect?

[blooddoc]

To put it another way, you are penalized for saving (delayed or denied gratification, stigma of not being a "player") and rewarded for debt (get it now! Welcome to the club!). We have moved from a producer society to a consumption society, with the majority of jobs in the service sector. We don't make anything anymore, we just move paper (and french fries) around and call it being productive. Turning this around will be painful and, we can hope, transformative in a positive way.

[mattjs85]

But what if central banks are the causes of us using credit cards like drunks, buying homes with teaser rates, and our ease with starting wars?

[FogBelter]

You know, Bonddad. I love the Pirates of the Caribbean ride in Disneyland ... have since it first terrified me when I was four years old,

You know the part of the ride where you are floating lazily on the bayou with "Oh Susanna" being slowly picked on the banjo ... the glowing eyes of the alligators ... and in the distance, muffled, bloodcurdling screams ...

You see this talking skull above the entrance of a murky passage ... "Dead Men Tell No Tales"

You know what happens next? That's where I think we find ourselves now ... better hold on to something, everyone.

[UnknownSoldier]

good point

[antigonish3]

What does everybody expect? Recessions and depressions are created by central banking and fiat currency. Not by a lack of liquidity. Not by greedy capitalists. It is caused by central bank rates that are not at the level that market equilibrium would set.
Our "leaders" have already guaranteed a depression by voting for the $700 billion bailout of wall street. When you have a central bank, it then necessitates corrections. Every "downturn," recession, and depression are corrections. Bailing them out pushed back this correction which will result in a depression.
Obama needs to call for income tax rates being taken down to 0% across the board, capital gains rates to 0%, and every other federal tax rate to 0%. Then he should deregulate industry as much as possible. If he does those things, the correction will be sharp but short. Otherwise, we're in for a wild ride, not a fun ride either.
How does regulation aid an economy during a depression?
How do taxes aid an economy during a depression?
The answer is...they don't.
What does Barack Obama come out and say today?
"Well, I don't think it's good policy for the president or a president-elect to second-guess the Fed, which is an independent body."
He doesn't think it's ok for him to question an institution that counterfeits money and robs his soon-to-be constituents. Barack Obama is either completely ignorant of economics or a coward. It is very possible he is both.

[anandakos]

Methinks the lady doth simplify too much. Do you honestly believe there were no depressions before "central bank(s) .. necessitate(d) corrections?" There were plenty -- one about every fifteen years -- and some were doozies.

And where exactly in your lunatic imaginings are we going to get the money for our happy adventures in the middle east, all the toys and "unintended consequences" for which your neo-con adventurer heroes have indebted us, and the money to repair -- let alone build new -- highways, waterways, schools and so forth if we "take down every federal tax rate to 0%?"

Even assuming that we threw the millions of widows and orphans for whom Social Security, Medicare and Medicaid provide most if not all their income into a snow drift, ejected all deadbeat whores from welfare, laid off every one of the two and a half million plus Federal workforce, and discharged the entire US military, we would STILL have to pay the interest on the stupendous 10+ trillion dollars of accumulated national debt -- 4/5 of which was assumed by Saint Ronnie and the Bush-leaguers "rewarding the entrepreneurs of Amurrica" (i.e. by buying votes and "drowning the government").

And which industry do you want deregulated more than it already is? Steel? Autos? Pharmaceuticals? Transportation? Food and agriculture? Finance? Let's appoint Bernie Madoff to the SEC chair. You betcha!

[mattjs85]

Yes, because everybody that doesn't subscribe to your brand of liberalism must be a neocon and a supply-sider.

The crazy thing is that neocons *are* liberals. To the objective outsider, the difference between liberals and neocons is nil.

[anandakos]

(Continued; read the lower post first)

You are correct that the Federal Reserve failed miserably in its primary purpose of controlling the volume of fiat money and did so for the entire tenure of His Holiness, Alan the Objectivist. If you will honestly look at the history of the institution you will find that monetary policy was consistently better under Chairmen (unfortunately, they have always been men....) appointed by Democrats. The Republican appointees seem consistently to crave "punchbowls" spiked with what they see as the Everclear of "deregulation" but turns out to be one of Jim Jones' finest Kool-Aid flavors: Raspberry Corruption or Grape Fraud.

President-elect Obama has to walk an extremely fine line between doing too little and doing too much fiscally. Too little and the recessionary spiral turns into real deflation. Too much and in a couple of years the dollar will look like the one in Bobby Mugabe's cholera ward. Cutting off all federal revenues would be buying a ticket to Zimbabwe.

Your ravings from the Asylum for Worshippers of the Laughable Curve are not helpful.

[enemyartist]

The Fact is, is that the Federal Reserve is one of the main problems this country has in this economical crises we face! We didn't have a Federal Reserve prior to 1913 and we do not need a federal reserve today, period. We went into the first Great Depression shortly after the federal reserve was created and here we are getting ready to face one again, due in part to Alan Greenspan and the Federal Reserve (as well as a lot of other things - But I bet you can tie them all back to federal reserve doings). The federal reserve is a PRIVATE bank that is Printing and charging us interest on our own money, money that should be printed and controlled by congress thru our treasury as stated in the Constitution of the United States (a document many people in our government and country have forgotten about or over looked). The federal reserves lowering and raising interest on our money (which should be interest free) is a major contributor to our financial woes, along side Reaganomics and Clintons deregulations. Wake up people, the federal reserve is anything but federal and is a middle man making millions, billions or even trillions of dollars off OUR money! End the Federal Reserve and watch our problems start to clear up. Also end these illegal wars where we are wasting billions of dollars and watch this country get back into a much better economic state! view my blog @ http://enemyartistkristofer.blogspot.com

[Poboy]

The Republicans (Masters), along with their slaves (Democrats,) caused this country's (America's) social, economic, financial and public ruin.... AGAIN.

[jerrypl]

Bernanke should be fired, the Fed dissolved and the Congress should decide how the Treasury will handle these rescue plan policies. There is no problem with liquidity. There is trillions of dollars of liquidity. The taxpayers are taking on worth-less debt from financial institutions that neither trust each other, nor offer transparency or truth. Devaluing the dollar by lowering the Fed rate accomplishes nothing but more bad news and hard times. Credit is frozen Bada Bing Bernanke because the taxpayers have reached their debt capacity. They are afraid to borrow because the nation might find themselves in a depression coming soon to your neighborhood!!! Is Bada Bing that stupid?

http://eye-on-washington.blogspot.com

[grateful4thedead]

Some food for thought:

The Federal Reserve's action today is certainly historic in anyone's book and for those with even a fairly decent understanding of economic issues, a signal was sent strongly that we have major and serious economic issues, MUCH moreso than the slant delivered by the main stream and main street media. It could be argued that today's move is the single most cataclysmic action ever in the history of the Fed.

Yet.....too many people flock to blogs like this one that are featuring headlines of Eliot Spitzer and his call girl or the debate over princess Caroline and the New York Senate seat. I chuckle when there are thousands of comments about Spitzer, Caroline Kennedy, Madonna and her divorce, etc. and a column such as this one gets buried and 20 people jump in to comment.

I could write more, but perhaps I'll join the rest of the American majority and immerse myself in "dancing with the stars" or watching "deal or no deal".