On Tuesday, 9/18/07, the Federal Reserve cut the federal funds rate and the discount rate by 50 basis points (1/2%). The immediately obvious effects were a surge in stock, oil and gold prices. But what will be the long-term effect? A number of observations and postulations may be made, any one of which is subject to rebuttal:
- Having “bailed out the big boys” (large banks, financial concerns, mortgage companies, corporations, and possibly some home buyers), the move will also cause the value of the dollar to drop and inflation to increase.
- Gold, oil (gasoline), and other commodities will go up in price due to the effects outlined in item number 1.
- The standard of living of the elderly and others on fixed incomes will suffer.
- Prices of nearly everything you buy at Wal-Mart and at the grocery will increase.
- The working man will be least affected since wages will increase along with inflation; his standard of living will suffer, but a bit less so than the elderly.
- The rich will get richer as the poor get poorer.
- Foreign holdings will begin to buy even more of the USA – real estate, corporations, etc., as they become cheaper in foreign currency terms.
- Foreign countries will be less inclined to buy US Treasuries, exacerbating the drop in value of the dollar. Should they decide to sell substantial amounts of dollar-denominated securities, all hell could break loose.
- The dire consequences of the Federal Reserve’s foolish manipulation of interest rates over the past decade may be delayed, but not prevented.
We here in Vicksburg will certainly be affected by this decision of the Fed. Have you given it much thought? What is your perspective?
VICKSBURG SPEAKS 
No matter HOW many times it has been explained to me, I always am confused by what rate cuts mean to the stock market. It’s like my mind hears the explanation, and then the little hamster wheel starts turning, faster and faster, my eyes glaze over, and then VOILA! I know as much as I did before the explanation!!! BUT, I have a couple of things to say:
First off, aren’t we ALL on a fixed income, really? Because we sure can’t go in and say, hey, Boss, how’s about giving me some more money? What say you do that, okay? Yeah. Not too many people, at least no one I know.
Also, things are already higher, as my trip to Wal-mart today can attest. A half gallon of milk was higher than I have seen it in a while. I mean, is there a lack of cows, suddenly? Are barrels of milk as high as barrels of oil? And yes, the middle class will be the ones to get squeezed – in everything from groceries to medicine, two things that I buy a lot of every week, because there are no programs that will help us out. At least there is Medicare for the elderly (I KNOW it isn’t perfect, but at least it’s there), and it seems that quite a few of the drug companies do have programs in place to prevent the elderly from having to choose what they can afford this month – the aforementioned carton of milk or their high blood pressure medicine.
So, I will just muddle along, on my “fixed income”, wishin’ and hopin’ that the Prize Patrol will come whipping into my driveway soon, with balloons and a big check with my name on it! Maybe then I can open a theater here in Vicksburg and another problem will be solved!!! Yeah, it could happen…..right?
Oops, I may have bloviated instead of pithing my comments. Thorry ’bout that!!
That’s ok Tricia. Listen I don’t understand how rate cutes work with the stock market either. But I can tell you this–the Fed is criticizing for this cut becouts with subprime mortgage which is alive well in this market I might add. Well I can tell u the Battlefield Inn is up for sale. That I find out on Yahoo Real Estate yesterday.Already,before the Fed cut,200 homes were foreclosed on in Jackson. Now here’s an interesting fact: the illusterious Vicksburg Post hasn’t reported on the subprime sitution in this town.But the realtors are talking about. And no home units haven’t been sold I don’t care what some realtors say. I priced homes here from 899,000 to 200,000. I doubt if a fed rate cut could save this housing hubble. It hasn’t helped at all.
Now the high cost gas has effected food. Becouse of transportation costs. And all summer tourism took dropped,local restraunts as well do to high gas costs. Last year this selfish port didn’t go below 2.00 becous Pantry Inc which owns Kangeroos can’t afford to go below 2.00. Why? becouse they’ll loose revenue and if the barrell price falls they’ll loose revenue
But there are new energies on the horizon. T Boone Pickens is pushing nautral gas as alternative to gaseline. Already its being practiced in Texas and Georgia. But this port lives in the past too much.
VS, I have been trying to decipher all this myself. I mean if Warren Buffett is buying gold and euros, what should we be doing?? In the old days if the market went up (thus consumer confidence went up), didn’t gold go down (due to consumer confidence)? But when the market goes up and gold goes up. . .you have to think there may be some big things out there looming. And if they are looming, what’s the best thing to do? Stay in the market, convert to cash. . .what? Maybe somebody on this board has a much better grasp and can help us with this. I have been reading a very enlightening book “The Hydrogen Economy”. . .very slow reading but very interesting, at least the first two chapters are! It helps with understanding our fuel-based economy past, present and probably what the future holds. I am thinking that we could be in lots of trouble if the Saudis continued to divest themselves of US dollars. . .but on the other hand, they want our oil dollars. Any economy gurus who can help us understand all this?
PS – Also, we may have reached the point where oil isn’t going back down. . .based on the amount of reserves left. The Hydrogen Economy book has a really good explanation of this.
Anon, I think the Fed made a grave error in dropping interest rates. Rather than having the guts to do what’s best for the country’s future, the gutless asses dropped the rates and saved their fellow asses on Wall Street. In the process, they sacrificed the dollar. The Saudis are a worry if they’re dumping the dollar, but China and other Asian countries are a bigger worry. The one thing that may save the day (temporarily) is that if the Chinese and others let it be known that they’re dumping dollars, the flood gates will open. I believe they’ll come out with a statement supporting the dollar in order to save their big caches of the greenback. That may give us a little time to GET OUT of the dollar with our investments. Swiss Francs, Japanese Yen, etc., are up sharply today, but they are probably going higher. Buy gold, silver, oil, foreign currencies.
PS. And keep at least 2 weeks supply of food, water, and all other staples on hand at all times.
I was on the Drudge Report no more than a minute ago. Now guess what else has happpen. Besides a weak American dollar now there’s a weak Canadian dollor too. Curriencies I don’t follow too much but the Euro has gained on the dollor too.