The Fed Meets Today

Today our central bank, The Federal Reserve Bank, is having a meeting and everyone around the world is watching, waiting and trying to anticipate what is going to take place at that meeting. Regardless of what the Fed decides to do, there are going to be side effects because the “patient”, our economy, is suffering from several economic and political ailments. When thinking about our economy and the Fed, think patient and doctor. Then realize that like so many medications prescribed by the doctor, there are side effects. In some cases the side effects are almost as bad as the problem itself.

First up is inflation, and the prospects of inflation accelerating is very real as energy prices continue to go up and up as they have over the last year to 18 months. The price of so many products have been affected by the increased fuel and energy costs. In Hawaii, where much of the food has to be transported into the islands, transportation costs have necessitated that retailers raise their prices to account for the increased cost of delivery to the islands. People can not just drink coffee and eat pineapples all day, children need a balanced diet. So, when the members of the Fed sit down today to have their meeting, they have to think about what fuel prices are doing to inflation. Normally, the way the Fed would slow the rate of inflation would be to raise interest rates. But, the economy is in a bit of a recession. President Bush does not think we are in a recession, and by a strict definition of a recession, we are not there yet. But, there has been several economic or market events that have taken place in the last year to year and a half that indicate that a recession is not far behind or out of the picture.

The American economy has experienced a credit crisis with huge ramifications for the growth of the economy. Many banks are facing loan losses from the slow down in the growth of the economy. The housing market is going through turbulent times and the sub-prime mortgage crisis has had a tremendous impact not only on the housing market, but because these mortgages were securitized into mortgage bonds, the holders of these sub-prime mortgage bonds are also a casualty of the economic crisis. Given all this and more that has not been mentioned here, the Fed would like to keep interest rates where they are, unchanged.

So, the trick is to keep interest rates down to help the economy through these difficult times, while at the same time hope that inflation will not rise too rapidly and cause further economic damage. And all this, without the federal government changing its spending habits. If we could in reality stop spending money overseas on so many different projects, like the “war” in Iraq, the government could spend those same dollars here at home in the United States rebuilding our infrastructure. That along with a movement, completely voluntary, to use less gas and buy less imported goods when possible would all help our economy. The second idea is probably impossible to do since so many items are no longer produced in the USA anymore.

Budgets of almost every American family have been impacted by the sudden increase in the cost of oil and the refined products of diesel and gasoline. We do not have lines at the gas station as there is plenty of gas. But, the sudden spike in the price of fuel has caused a dislocation in the national economy much the same way a stiff tax would do, except a stiff tax would pay down our budget deficit and at least push the US dollar up in value on the foreign currency exchanges around the world. But, we are not even getting that benefit because the price increase is actually causing the US dollar to further decline because we are importing so much oil.

Economically, the United States’ economy is in a box. Politically, the United States is in a presidential election year with just a few more months before the November election. Either way, not much is going to happen until there is a new president and a new congress. My fellow Americans, for the next few months, many of us are going to be in for some tough times. For some of us this is going to feel like war. In truth, we are in the midst of an economic war and one of the weapons is oil and while we can get as much gasoline as we want, that is not the question. The question is how much can we afford. This is the time for those of us that want to survive, to go into survival mode. Many already have, and many more of us will follow before this economic war is over. There are things that the government can do to easy the pain. Let us hope that some new measures might be taken to reduce the problems that the political- economy has caused for so many of us. Stay Tuned.