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

[twofish]

It's my impression that the Fed has two levers. One controls Fed interest rates (up or down). The other one cranks the printing presses up or down. So the second one is all they have left. If that's so and they keep cranking it up, Weimar bushel-bas­ket-o-bill­s-for-a-lo­af-of-brea­d, here we come! And you know what followed Weimar hyperinflation.

[neem]

The government needs to create jobs. If someone is unemployed, they won't spend a lot of money, no matter what interest rates are. Also, once someone gets a job, doing something that is honestly useful (like repairing our crumbling infrastructure), I think they will tend to feel better and would naturally tend to start spending SOME money again. Obama will try to put people back to work. My big worry is: there is still 6 weeks of Bush left, and the economy will certainly continue to contract..­. the only question is, how much will the economy contract between now and late January?

[grateful4thedead]

It is likely that the economy will continue to contract well into 2009 and the time to go from that contraction to an improvemen­t/expansio­n could take 2 years or more.

putting aside the politics of bush or obama for that matter, this situation is really being run by bernanke and paulson and given what they have been presented with, they are pretty much doing all they can. ironically, most economists/finance people on both sides of the aisle are close in their agreement that what is happening is the right course, probably because it is the only course at this juncture!

bottom line is that it just takes time for these actions to have the sought after reaction.

[Overd0g]

Great. More government employees. Just what we need.

[AddictedToHope]

Well, they could always start PAYING people to borrow money.

[grateful4thedead]

Mr. Stewart:

Excellent summary of a very complex subject.

Unfortunately, your closing paragraph about the Fed being scared is all too accurate.

That's scary.

[larry278]

2 tru. It looks like the Fed has shot its wad. Obama's administration has a situation similar to the situation FDR faced in 1933. It is also a worse situation. Obama's administration will need a great deal of skill, original thinking & luck to get us out of this mess.
The cynic in me wants to say, It's the same old, same old. White people never let a person of color have anything till its broken, worn out & can't be repaired. I hope that I'm wrong & Obama's administration leads us into recovery.

[TheOpinionGuy]

Welcome Japan-style recession!!!

Deflation here we come!!!

[Kram]

Its a GREAT REPUBLICAN economy! Just need another round of tax cuts for billionaires, and all will be fine! Our fundamentals is strong!

[sunbeltvoter]

photo links to charts in article don't work

thanx for the review, Lil Brother.

[bthechangeyouseek]

We have experience that cutting key interest rates does not stimulate the current economy. Maybe in a credit market it would. Unfortunately no one is offering additional credit and to the kudos of some consumers--many don't want more credit, they would take money and pay debt off. Why do we as a nation of smart economists continue to stimulate an economy from the top down? Many good comments and ideas listed here.

[ReasonIsMyReligion]

Too bad WWIII would be nuclear.
Nothing like a WW to fire up the factories.

[bthechangeyouseek]

I think that is exactly what this administration thought, war brings about better economy. We are no longer in an industrial age and too many of our tangible weapons are outsourced. Not sure a WW would bring anything but further destruction.

[ReasonIsMyReligion]

They weren't that altruistic.
They were happy with war being good for totalitarianism and war profiteering.
Even over the first seven years, there was no benefit to the overall economy, yet they still "stayed the course."

[TheUnpopularQuestion]

Dear Mr. Stewart,

Yes, your article is correct, applause, applause..­. Indeed, "The Fed has no interest rate moves left". But note the qualifier "interest rate moves". The next message to bank executives should very well be..."Loan out the billions we've given you or go straight to jail, do not collect 200 dollars (if you remember Monopoly)". No Joke... And no, I don't care if it sounds like...or even is, socialism. Thanks!

[Trebor1]

No one can repay the loans they have now - we need a better distribution of wealth!!

[hu.man]

All things being equal, if the government just simply gave large sums of money away to the public our current problem will be solved because the consumer demand will be stimulated with the additional cash. This, of course, is a theoretical solution because it cannot happen in real life. There is a distribution issue in that there is a real danger of igniting inflation and causing even bigger problems if large sums of money are just given to the public.

So the problem is lackluster demand. There are other ways of stimulating demand, such as targeted government spending, providing incentives to businesses to create employment which in turn can stimulate consumer demand. Absence any other external factors that can cause real economic malaise such as armed conflicts that can result in wholesale destruction of an economy's basic infrastructure or sudden increase is basic commodity prices such as energy, any other crisis is one of confidence. That is what we are in now.

There is a real crisis of confidence in our current leadership and its ability to handle and set direction for the country and economy. Indeed, it looks as if there is a vacuum of leadership. With Obama taking over the steering wheel, we are looking at a different type of leadership coming on board and one that can engender confidence in public to loosen the purse strings and start spending again to stimulate the economy.

[bthechangeyouseek]

Many of these ideas have been mentioned by the new administration. I am not expecting a miracle, but I do believe life will be different in the next 30 days.

[Craig]

I'm reading two arguments why the dollar won't debase and why we will contunue to see deflation for the next 5-7 years

1--The fed activities are not really new debt, but loans, with the expectation of being paid back.

2--Individual savings will increase and more than offset any deficits not paid back.

Does this make sense? Will we ever get back $150 billion from AIG?

[hu.man]

Virtually all the $$ put into the banking system will be returned unless the institutions being shored up go under which government won't allow. Remember, other than the mortgage crisis, none of the banks and financial institutions who were injected with Federal funds have a real mismanagement problem. So being that the mortgage issue is endemic, all these financial institutions will recover in due course and government will see a return on their "investment" or "bailout" portfolio or whatever you want to call it.

[vippy]

Thank your fiscal irresponsible politicians who got us into this mess and you kept voting for them
time after time again. Aren't we proud of the word "experience" now?

[veracitatus]

There is another way to look at things. The meltdown of the economy is an opportunity if we were able to recognize this fact.

The traditional consumption of junk and oversized stuff and borrowing in order to keep spending is madness. Why would any sane person wish to restore that? Jobs? We create jobs in the sectors for building junk and providing unnecessary services just so people can buy junk and unnecessary service (and spend hours in front of the boob tube). This is beyond madness.

instead of bailing out bankers we should be creating worthwhile jobs in local community agriculture and building an energy infrastructure. We should be investing in education for a realistic future, one where we stop wasting energy.

Instead we worry about how we can get back to profligate consumption of the Earth's resources without considering the consequences.

Madness.

Question Everything http://questioneverything.typepad.com/

[HappyIdiot2008]

Let's hope the prices start going down so the middle class can afford to buy again. Until then, forget it. Credit is not the way anymore.

[Vinca]

IF THIS INTEREST CUT, DOESN'T WORK< THEY DEFINITELY SHOULDN'T GO LOWER. I GUESS FOR CHRISTMAS, A GREAT MANY WILL BUY EVERTHING FROM CHINA, OR OTHER COUNTRIES, AND CHARGE IT ON CREDIT CARDS, < A GREAT MANY ARE JOBLESS< BUSH'S LEGACEY< WILL BE AS OUR WORST PRESIDENT< AS I SAID MANY TIMES< GOOD PAYING JOBS ARE THE ANSWER FOR THIS SLUMP WE'RE IN

[hu.man]

"instead of bailing out bankers we should be creating worthwhile jobs in local community".

We need to do both. As for the banking sector, you will continue to see the need to inject liquidity which means another trillion dollars or so going into shoring them up. There really is no choice on this as banks are the bedrock of the economy and without a healthy functioning banking system nothing can be accomplished. Hopefully, the lessons learned from this crisis can be as valuable as the price tag.

[veracitatus]

Sorry hu.man but you have really bought the stock story, hook, line, and sinker. Banking as practiced in the western world is absolutely wrong and what is causing so much grief now. We need an economy based on production of useful goods and services, not an economy based on borrowing to buy useless stuff. Any borrowing should be done against past savings not future earnings. The reason is actually simple, but still requires you to drop the received wisdom if you are going to see it.

The fact is that we are running out of net energy to do economic work. We have been since the 70s but because the production rates for oil were increasing we didn't notice. The problem is that we have reached the peak of oil production and the energy return on energy invested is declining more rapidly. Result: less energy to do the work of an economy.

To a mind solidly schooled in neo-classical economics this will never make any sense. I understand that. But if you want to re-educate yourself to biophysical reality (and the new economics) you might just be able to see the reality of what is going on right now.

[Texasbacksass]

Here it is point blank.

We are in the first days of a full blown depression. We know it. "They" know it. Everyone at every level is starting to feel it; even the rich that got fleeced out of their riches...b­ut damned few of us actually have the intestinal fortitude to say "DEPRESSION" out loud.

[Kram]

Been using the "D" word for a while now. People use to laugh at me and say I was nuts. Now they are saying the same thing. This is one time I wish I would have been wrong.

[larry278]

Yes, it's turning into a depression. It would be nice to be wrong & see people working, saving, rebuilding our infrastructure in Dec, 2010.

[drkazmd65]

I haven't used the "D" word yet,... but I am getting real close to 'finally' admitting it. It is starting to look fairly obvious even to an over-edumacated science nerd that hasn't studied Economics (101 & 102) since back in the mid 1980s.

Although - I have been saying we are in a Recession for more than a year. At least I got that part right. Small solace.

[usna73]

I agree with you and have the track record of predicting it for over one year, right here on Bonddad's blog.

Here i what we must do now to assure that this misery can be used as a solid base to build upon as President Obama leads us to a new era:

1) Allow the market to clear of the overpriced assets including houses. DO NOT bail out anyone who is underwater.

2) Provide a humane alternative to those who find themselves broke or homeless. BUILD communities and to hell with private homebuilders. Allow them to go bankrupt.

3) Provide Universal Health Care at the tru cost of Medicare.

4) Lend money to anyone and everyone for education and retraining. Establish a national policy towards energy independence and "green" thinking in this respect. Make the only qualifications your determination and/or intellect.

5) Rebuild the enitre infrastructure of the nation from coast to coast.

6) Strip those banks who have not loaned out the tarp FUNDS TO CREDIT WORTHY BORROWERS. WE WON'T NEED THEM ANYWAY.

Tell China that if they won't suck up the deficit we have to endure with the cash reserves they have accumulated it is game over.

No more BS and no more complaining from the new technocrats. No more right wing laissez faire baloney. Let's produce somthing and stay in this thing together.

[davedave]

we are as screwed as we are, with or without the fed's intervention.

their actions are just a disclaimer. "We did all we could do! Don't blame us."

d