Why Is The Federal Reserve Board So Concerned?

The Federal Reserve Board is taking unusual actions in the markets in the face of what seems like a healthy economy and a stock market that is up nicely year to date.

In the last twenty four hours, the Fed has taken some very unusual emergency-like actions, as if we are facing some unspoken crisis.

In the past day, the Federal Reserve Board has taken three steps:

1) Lowered in federal funds rate
2) Lowered the discount rates making it easier for banks to borrow money
3) Pumped 41 billion dollars into the U.S. financial system

Why is this so unusual? Let’s look at the federal funds rate first. Typically they lower those rates when inflation concerns are not present and the economy is strong. Well the economy showed good growth yesterday in the 3rd quarter. There are definitely inflationary pressures with oil at record highs well over $ 90 a barrel.

Thursday’s infusion of 41 billion dollars into the U.S. financial system is the largest cash infusion since September 2001. In 2001, we were facing a stock market that was getting clobbered, a weak economy, and a devastating terrorist attack. Today, we have strong economic growth and what appears to be a strong stock market.

However, is everything so strong? This comes back to my central argument about debt. This is a debt problem. It was reported today that foreclosures have doubled over the past year. Other types of loans besides mortgages are going into default at an alarming clip. The record price of oil will start to make its way to the gas price, creating even more pressures on the consumer. Finally, signs are showing that the consumer is getting into trouble and that consumer spending is at risk.

The problem is that a debt bubble is bursting. It is a slow process and it takes a little while for it to spread through the system. Some will argue that the Fed will be able to save the day. Well there comes a day when their life-saving strategies might not work. If you look at these extraordinary measures taken over the past twenty four hours and you look at Thursday’s stock market decline. It doesn’t appear to be much in the way of confidence.

I know that I have been on this bearish bandwagon for a while now. Just because things have not shown up doesn’t mean that they are not there. Please be aware of the risk that you taking.

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