Maybe the sixth time will be the charm. Then again, it might ultimately create more issues than it resolves. The Federal Reserve will most certainly cut interest rates for a sixth time at today’s meeting in an effort to erase payment increases on adjustable-rate mortgages, cushion the economic blow of a recession and vanquish the credit crunch.
A sixth interest rate cut, much as with the previous five, will be received with open arms by those with resetting ARMs. Homeowners with adjustable-rate mortgages facing a reset in the coming months have the Fed to thank for an adjustment that will be much ado about nothing, or can in some cases even cause the payments to decline. Talk about a mulligan. Millions of homeowners will get a yearlong reprieve from a painful payment adjustment thanks to the repeated Federal Reserve moves, something that will be far more significant to far more people than any foreclosure relief plan or coalition of government and lenders.
The full effects of Federal Reserve rate cuts are felt with a lag, and the sixth rate cut will, just as with moves four and five during January, represent significant juice to economic growth in the fourth quarter of 2008 and for 2009.
But the Fed rate cuts have proven completely ineffective at warding off the credit crunch, and at best have kept it from being worse. That is little consolation with the credit markets in intensive care, carrying a disease that can infect the entire economy.
What repeated Fed rate cuts may prove very effective at is inciting inflation. The February Consumer Price Index was flat versus the month prior, which may validate to some the Fed’s long-held stance that inflation pressures would ultimately moderate. So let me ask, does it feel like inflation was flat in February? Not from where I’m standing. In fact, let’s revisit just a few statistics. As I write this, oil is over $110 per barrel, the dollar is at yet another low against the euro ($1.56), gold is over $1,000 an ounce, and in the past 12 months the headline and core CPI are up 4 percent and 2.3 percent, respectively. If anyone truly believes that inflation is a non-issue, there is a bridge I want to sell you. If the headline CPI were to get back to a year-over-year rate of 2.5 percent — what I would call a level where inflation is a non-issue — the CPI would need to remain flat for the next four months!
Sooner or later, the Federal Reserve will have to contend with inflation. That is better done with some restraint on further rate cuts now, rather than with the painful fallout later once the inflation genie is completely out of the bottle.