US Fed Rate Cuts As Economy Slows

Investing

US Fed Rate Cuts As Economy Slows

13th December 2007

If you have been following the economy and the markets then you'd have known that the US dollar weakened significantly about a fortnight ago. Oil prices were also somewhat floating around due to the slowed growth in the economy. It looks as though we have finally reached a recession in the US economy. Let's examine what's going on here.

Investing The US fed cut rates about 1/4 point or 0.25%. The rate cut was to be expected although 0.25% was a much lower rate cut than was expected, a disappointing result that consequently led investors into a sell off. The situation here is that Bernanke, the US Fed Reserve chairman, is faced with the difficult task of having to prop up the slowing economy which is deflating as asset prices decline, and at the same time unable to lower interest rates too quickly or too far because of increasing inflationary pressures.

As you may know we have faced a flat housing market and stocks have done the roller-coaster run around on the markets in 2007. The US economy is now experiencing what I would call a decline and the opposite of growth. Yes ladies and gents our economy is slowing meaning things aren't looking too good for us.

Bloomberg announced that the US Fed, the European central bank and three other central banks have moved in concert to provide more needed liquidity to the banking system. The Fed will provide US$24 billion to ECB and Swiss National Bank and it will also hold 4 auctions that will add a further estimated $40 billion to increase liquidity.

All hope is not lost as I'm an optimist and I believe that the US markets as well as international markets will bounce back and this sentiment has already begun to be felt as the main US equity indices came up firmly again on Wednesday. This is as a result of money coming in looking for those cheaper prices.

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets. " - Peter Lynch

Comments (9):

Fally Says: I tend to agree that markets will bounce back although I will maintain a bearish sentiment for first quarter 2008 | 12.13.2007 |

De Souza Says: The weakened dollar isn't doing too good and it looks like most investors have decided to look to other currencies like the Euro | 12.13.2007 |

Trader Says: It is a good time to look into going the Euro route as I don't expect the US dollar to gain much over the coming months | 12.13.2007 |

Bonnie Says: From the action taken by the Feds the mortgage market will remain flat for a while | 12.13.2007 |

Tess Says: I also have a bearish outlook for markets in the first part of 2008 although we might see some significant gains | 12.13.2007 |

Leila Says: One thing for sure is that long-term bonds was not such a bad move in 2007 if were laddering your investments and CD's | 12.13.2007 |

Alan Says: A solid investment plan in 2008 is necessary because I still expect that markets will still be quite volatile but probably not as wild as in 2007 | 12.13.2007 |

Shayne Says: Judging from what I've seen in the markets and reading this article it seems there is a major liquidity problem that is facing the US | 12.13.2007 |

Michael Says: 2007 was a good year to buy a property having negotiated at prime | 12.13.2007 |

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US Fed Rate Cuts As Economy Slows

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