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There is an argument against further rate cuts


There are a number of economists who believe the Fed should stop cutting the fed funds rate.

The stock market has begun to rally as we head into the second quarter. The market has priced in an additional fifty basis point cut to the fed funds rate in lieu of another disappointing report on the jobs market from last week. While many investors will see this as good news as the cost of borrowing money continues to decline, there are a number of economists who are now beginning to discuss the long term negative impact of continuing down this course of action. The fed faces a significant challenge in balancing monetary policy and needs to not only look at the short term, but focus on long term economic growth and inflation as well. Many individuals who have grown critical of the Fed believe that all of the cheap money will only act as a band aid to the present problems and are actually creating larger problems as the value of the U.S. dollar continues to deteriorate. The economy we lie in today is very much a global economy, as the dollar continues to drop we will see larger increases in inflation, especially during a period where the cost of oil has risen over 30% during the past twelve months. The large concern is that once we have used up the fed rate cut ammunition, the government will then have no leverage in trying to curtail inflation and stimulate growth via monetary policy and may be forced into raising the fed funds rate almost as quickly as they have lowered it. There is no guarantee that the dollar will bounce back on these actions. This will be very important to watch as we head into late April and begin heading into the summer a peak period for driving and oil consumption. 

4-7-2008 ? LoanNetwork.com





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