So the headlines describe the reaction to yesterday’s FED decision to hold the Federal Funds Rate constant at 2% and not to raise it to fight inflation and today’s ECU decision to hold the short term rate firm so that the Libor stays steady at 2.45%. These decisions have produced a huge rally in the stock market. London and European banks while concerned about inflation are not using short term interest rates as a club to blunt inflation. It seems they are also concerned about weakness in their respective economies and share some of the FED’s concerns about fighting recession.
So the FED is implying that inflation is going to moderate in the future due to other causes and and raising short term rates to put the brakes on the economy to fight inflation is not the right thing to do to an economy that is producing just 1% growth, staying just ahead of the technical definition of recession (two consecutive quarters of negative growth). The FED is sending a message that supply and demand factors can influence the price of oil, even though worldwide demand for oil is increasing and supplies have not increased significantly yet. The signal is that the economy can absorb the costs of high priced oil if consumers are willing to change their behavior. And we have seen consumers do just that. They have stopped buying large cars and trucks and have started buying smaller cars. The car companies are having to tweak their business models.
So, while the effect of high prices is causing headaches for consumers, consumers can control their driving habits and are doing so. Consumers can control their spending and saving habits and are starting to do so, they will no longer depend on freewheeling lender deals to qualify for buying a house. Firs time homebuyers are taking advantage of FHA 95% money and qualifying the old fashioned way– with high credit scores and good jobs and pooling family or other friendly money to make downpayments. This should be good news . It’s good news that what our parents taught us or should have taught us in Kindergarten still applies and that there are not new rules. It still makes sense to live within your means and save money and when you have to borrow money be a good borrower and pay on time to have a good credit rating. The rules have not changed.You cannot borrow forever, repeatedly refinance your home to pull out money like an ATM and cunt on appreciation bailing you out. You cannot live a loose financial lifestyle and perpetually avoid the consequences.
Now if only the federal and state governments will come to their senses as well.
