Wednesday, April 30, 2008

Federal Funds Rate to 2%

Today, the Fed eases the overnight rate to 2%, hopefully ending a striking series of sudden decreases throughout the past 8 months.

A little history: in 2001, following the bust, the Fed dropped rates from 6.5% to just under 2 by the beginning of 2002, and the low rates continued to ebb down to 1% by 2004—and during this time we see the rise of the now infamous housing bubble. Huge amounts of ridiculously easy credit was extended. Beginning mid-2004, there was a steady rise of rates back to 5.25%, which held between June 2006 to September 2007.

In late 2007 the Fed began to ease again, which accelerated as credit markets froze from subprime defaults—among other recessionary forces like costs of oil, and an economy exhausted of borrowing. The rationale for the freeze and the Fed attempts to loosen the economy will be detailed in later posts.

There is some suggestions both within Fed statements and "on the street" of a pause at this point. If so, I forecast the bottom of the dollar is near: in the cash value equation, inventories will rise as less is bought, and credit supply has nowhere to go but down.

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