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Comments on: Fed cuts rates to 4.75% http://www.tvhe.co.nz/2007/09/19/fed-cuts-rates-to-475/ The Visible Hand in Economics Wed, 19 Sep 2007 23:18:01 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Matt Nolan http://www.tvhe.co.nz/2007/09/19/fed-cuts-rates-to-475/#comment-333 Wed, 19 Sep 2007 23:18:01 +0000 http://tvhe.wordpress.com/2007/09/19/fed-cuts-rates-to-475/#comment-333 I don’t think it will influence the housing market much either. However, I do think that cutting the cash rate as much as they did will weaken their exchange rate (if only by reducing the level of risk faced by hedge funds) causing an increase in tradable inflation. Sustained strong tradable inflation will cement in higher inflation expectations.

]]> By: Kimble http://www.tvhe.co.nz/2007/09/19/fed-cuts-rates-to-475/#comment-332 Wed, 19 Sep 2007 23:13:11 +0000 http://tvhe.wordpress.com/2007/09/19/fed-cuts-rates-to-475/#comment-332 I dont think that the drop in the interest rate will affect the US housing market. The funding which fuelled that surge has all but dried up, people now view the extra risk as expensive at any price.

]]> By: Matt Nolan http://www.tvhe.co.nz/2007/09/19/fed-cuts-rates-to-475/#comment-331 Wed, 19 Sep 2007 21:10:24 +0000 http://tvhe.wordpress.com/2007/09/19/fed-cuts-rates-to-475/#comment-331 I agree that the PPI measure has eased, and CPI eased today as well (2.0%pa). However, the fall in CPI is the result of easing pressure from the housing market. Price pressure from a weakening exchange rate and rising world commodity prices are still problematic.

Most of the time I would want the fed to look through tradeable inflation. However, inflation expectation in the US are still fairly high. A drop in the exchange rate and rising food and oil prices will further inflate peoples inflation expectations, which will lead to more resilience in the inflation rate in the future.

Someone at my work brought up a good point against what I said though. The fed had effectively cut rates 25 basis points in August (http://tvhe.wordpress.com/2007/09/14/has-the-fed-cut-rates-without-telling-anyone/) without telling anyone. As a result, a 25 basis point cut would be equivalent to no change in policy. So in effect, this 50 point cut was really only a 25 point cut.

It will be interesting to see how the American economy goes during the remainder of the year.

]]> By: Kimble http://www.tvhe.co.nz/2007/09/19/fed-cuts-rates-to-475/#comment-330 Wed, 19 Sep 2007 07:10:08 +0000 http://tvhe.wordpress.com/2007/09/19/fed-cuts-rates-to-475/#comment-330 The rate cut came on the back of the PPI dropping 1+% in August and imports dropped 0.3%-ish. I think it was this good news that allowed the Fed to cut rates.

CPI is out tomorrow, so that will be interesting.

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