Wednesday, December 12, 2007

What do these people want?

The Federal Reserve Board yesterday dropped interest rates a quarter point as was expected by most economists and the market reacted. But instead of rising after getting what they asked for, markets fell over 2%. All because, as some have said, they didn't drop rates enough... This is just nuts! These rates control how much our money is worth, do they really want the dollar that devalued?

The reasons I have been hearing recently, in addition to what I have said before, are so that banks will be willing to borrow from the Fed to loan to one another. In my mind, that seems like an insane way to do business, for both the borrower and the lender. On the borrower's end, why couldn't they just borrow from the Fed directly at the lower rate? And if, for some reason, the Fed won't loan to the bank, why would another bank want to take on more risk than they already have in their mortgage holdings?

In my opinion, the main reason the Fed did anything was because if they didn't, investor confidence in them would have dropped significantly. Unfortunately for Bernanke and friends, you can't please people who don't know what they want.

Oh, and guess what else, oil prices jumped 2% already, to be back over $90, in just the couple of hours since the rate drop. It had dropped into the upper 80s before the Fed meeting, so I can't give as strong a bet on $100 oil, but I still think it's likely.

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