Tough Decision for the Fed

Today is the much anticipated release of the Federal Open Market Committee minutes. This is an exceptionally difficult decision for the Fed. The market has already discounted another quarter point decline in the fed funds rate, so even if they do drop the rate the market may sell off anyway. Neither the market nor the economy got much of a boost from the September rate cut, so what exactly could they hope to gain from a smaller cut a month later? On the other hand of they don't cut, the market will certainly fall out of bed. What's a Fed Governor to do?

Meanwhile the dollar has been looking more like the yen...down, down, down. The entire world is getting very nervous about the dollar and it won't take much more downside to ignite an all out dollar panic. The bond market has been rallying into this anticipated rate cut, but eventually the bond market is going to start discounting the inflationary impact of these rate cuts, which will cut the legs out from under the market and the economy.

As for today, I am betting that the Fed will not cut the fed funds rate. There is too little to gain from a small cut and big risk on the dollar front with a bigger cut. Holding firm will generate a sharp move down in the stock market, especially in financial stocks, but probably not a bear market. Holding firm will also stabilize the dollar and maybe even generate a dollar rally. Overall the Fed gains credibility by holding firm and buys time to try to work out the credit mess.

Update: Well, the Fed cut the rate by a quarter point. As expected the dollar and bonds dropped sharply. Stocks finished higher after an initial plunge and gold rallied to close just below $800. Notable: Bill Gross stated that another full point reduction will be needed to relax tightening credit conditions. The Fed may be contemplating just that, in increments. The bond market will not like that much. I don't think there is any way out of this that is not painful. Inflation here we come.

I've Been on Tilt

I have not posted anything to this blog in weeks. The reason is that I have been on tilt...in a state of disbelief, suspended from participation of any kind in public dialogue. It all began with Democrat capitulation to President Bush on the Iraq war, followed by capitulation on FISA, and then to add a different dimension to the overall surreal state of public affairs, the deafening silence from both sides regarding the Larry Craig incident. Republicans are understandably embarrassed and would like the whole matter to just go away, but you can imagine their sustained public indignation if the transgressor had been a Democrat. Democrats on the other hand seem to be afraid of offending their gay constituency. Apparently it is politically incorrect among Democrats to criticize sexual indiscretions that occur between members of the same sex, no matter how depraved. Salon even jumped into the Craig issue with a featured piece about how "hot" bathroom sex is! I found myself wondering what planet I am on.

Follow up these events with continued capitulation by Democrats on virtually every point of contention with the most unpopular, clearly deluded and dangerous President in modern history and I find myself disoriented. The American people overturned the Republican Congress to put an end to the disastrous war in Iraq and the cowardice of the Democrats elected for that purpose is extremely disappointing. I am hoping that there is some method to the madness, and at some strategic point they will start holding the line, but at this point such thoughts seem more like fantasy than legitimate hope.

Personally, I am questioning what purpose it will serve to continue to weigh in on public affairs. Is there any value in putting forth a balanced view, or is it just a waste of time? Are we headed into ever more violent foreign policy and lawless government regardless of which party is in charge? Is political correctness (both "conservative" and "liberal" versions) so dominant that honest debate is no longer possible on any issue? Are we condemned to continue to be ruled by the least among us? I remain suspended and unsure of the answers to these questions.