Tuesday, March 18, 2008

Fed's Unintended Consequences

Interesting sub-heading beneath the headline of a Houston Chronicle story this morning by David Ivanovitch: “Consumer-Friendly rate cuts aim to stabilize what’s being called recession.”

The fact of the matter is, any rate cut by the Fed is not going to be consumer-friendly because of the unintended consequences: Lower interest rates will further weaken the US dollar, and make CD’s less attractive. The weaker dollar could actually boomerang and cause higher oil prices; and while lower interest rates will result in cheaper money to borrow, with fewer lenders willing to lend money at those rates.

Something to chew on.

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