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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerInvestor Mark Mobius said the U.S. Federal Reserve should eventually cut its benchmark, short-term interest rate to 1% to boost the U.S. economy, Bloomberg News reported Tuesday.
"With oil prices beginning to soften, there may be a chance for them to give a boost to the economy by lowering rates again," Mobius told Bloomberg News Tuesday. "It think it's still in the cards, but no one really knows." Mobius oversees about $40 billion in emerging market equities as executive chairman of Templeton Asset Management Ltd.
The doubling of oil prices over the past year and the more than $480 billion in housing-related, credit market write-offs are viewed by many economists as the primary culprits in the U.S. economic slowdown, a slowdown now beginning to dampen global growth, also. Oil prices have retreated about 20% from record-highs, falling to $118 per barrel early Tuesday morning, but unlike Mobius, economist David H. Wang isn't convinced the Fed should hit the 'accommodative button' just yet.
Too soon to lower interest rates?
"I think it would be premature for the Fed to ease rates further. The Fed has used new mechanisms, including the Term Auction Facility and the Term Securities Lending Facility, to help maintain financial system liquidity and the orderly function of markets, and so as long as no further stress events occur in the credit markets, I think they should stand pat on rates," Wang said.
Most economists expect the Fed to keep its key, short-term interest rate the same at 2% when it announces its decision Tuesday at 2:15 p.m. EDT, and also maintain a neutral stance regarding the risks posed to the U.S. economy from higher inflation versus a recession. In fact, in June, the Fed did not include a statement on the balance of risks. Wang said the Fed may do the same thing again and not issue a balance of risks statement.
"The Fed needs more data before it can reach an informed, reasonable decision on interest rate direction," Wang said. "I know there are some Fed members who would love to raise rates, but that would not be wise, given the weak U.S. economy. On the other hand, I'm sure there are Fed board members who'd love to cut rates, as well, but they'll have a tough case to make against the hawks, given trending higher inflation."
Wang added that, provided the price of oil continues to decline, that "may give the Fed some room to lower rates in the fall, if inflation pressures ease in tandem with lower oil prices." Wang added, "Right now, Mobius is a little premature in calling for a 1% rate."
Fed Analysis: Unlike product development, Fed monetary policy is one field where you want to be on-time -- not ahead of your time -- regarding an interest rate cut or rate increase. As economist Wang outlined, given the competing sets of evidence on prices and the economy, a stand-pat stance -- without an easing or tightening bias -- is prudent, at this juncture.
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Reader Comments (Page 1 of 1)
8-05-2008 @ 12:53PM
william lindblad said...
We shall see. Wall St. and investors ALWAYS want a rate decrease. Of course, they also don't give a damn about what it does to the economy and the middle class. Mr Wang is going with the consensus - stand pat.
I go with the few so-called hawks on the Fed board - raise - and this is why.
The present credit crunch is do mostly to fear within the banking community, standing pat or decreasing rates will do little to allieviate this condition nor will it do anything to slow inflation. While the government states that "core" inflation is bascially non-existent, the other parts of the picture speak the opposite. If food and energy ARE included, you get an entirely different picture. Ergo - we DO have inflation and that is the Fed's main reason for existence. Under Bernanke's tenure the Fed has become both predictable and a puppet of Wall St. Rasing the discount rate by 1/4 would be psychological only, but it would do two things. One would be to get some respect back to the Fed and the other would be the mental impact on the oil trading market. A 1/4 point move higher will bring the price of barrel back under 110, which in turn will help reduce inflation and bring the euro/dollar disparity back to around 150. It won't make wall St. happy, but it won't set off a run either.
We shall see if the have the guts to be independent.
8-05-2008 @ 1:27PM
David said...
Low interest rates is partly what is causing the weak dollar and high oil and gold prices. It affects the supply of money. Lowering them again would most likely be counterproductive. Of course, why does a government need to tax when all it has to do is borrow and inflate?
8-05-2008 @ 4:02PM
NYC Banker said...
I don't oversee $40 billion in emerging market equities, but I am smart enough to realize that cutting the rates to 1% would again raise oil and other commodity prices, further squeezing the average American, which would take its toll on the economy. Its effect on the dollar would also make the U.S. fire sale that much more attractive to foreign buyers.