Low rates land Fed in trouble

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    Low rates land Fed in trouble
    THE US stock market is teetering right over the abyss, and therefore so too is the US economy – and the entire world economy.

    The man who knows it as well as, and arguably better than anyone, is Alan Greenspan, who went before the US Congress during the week to paint an upbeat picture of both the present and the future.
    On one level he would, wouldn't he? Mandy Rice-Davies style.

    Was he going to stand there and calmly state that the economy was sodomised?

    To have done that would have forced him to admit there wasn't a single thing he – or more formally the Fed (their Reserve Bank) – could do to "fix it".

    With the US official interest rate at 1.75 per cent (compared with our 4.75 per cent), the Fed had little room to move to cut.

    Another cutwould obviously have sent confidence down the toilet.

    The lack of elbow room is due to short-term and long-term incompetence by the Fed. And in practice, that is spelt A L A N.

    For example, Greenspan did not find the chance to take back at least some of the post-9/11 "just-in-case" rate cuts, as our Reserve did in May-June. If he had, he could be operating from an official rate about 3 per cent.

    More fundamentally, by keeping US rates too low for too long, the Fed allowed the bubble to grow bigger and continue longer.

    Greenspan is absolutely terrified of being the guy with the pin in his hand when the bubble bursts completely.

    He is trying desperately to massage both the economy and the markets through 2002, so asset values come into line with reality over time.

    Last week he got lucky: On the statistics he could honestly point to relatively strong growth in the economy and even (half-honestly) raise the Fed's forecast for the 2002 calendar year.

    The only positive impact on Australia would be to rule out any further official rate rises this year, and even into 2003.

    One thing is clear: The US market (and the US dollar) are going to remain extraordinarily volatile though the rest of the year and well into 2003.

    We will be hit, but our volatility will be much less.

    The optimistic scenario is Greenspan succeeding with his massage, and the US market basically going sideways for two-to-four years or so.
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