No Fed Rate Cut Ahead

In what may be the last great act of his presidency, George Bush is sending many Americans tax rebates. The checks begin to go out today. Some households may get as much as $1,200.

What is not clear is how many citizens will go out and buy a new washer-dryer set and how many will simply stuff the money in their mattresses. One would cause inflation, while the other would only serve to hoard money as many families are beginning to hoard food.

The Fed has several reasons not to cut rates again.

First among those may be that inflation is rising much faster than government figures would show, at least for the goods and services that count most. Gas will probably hit $4 this summer. A bagel could cost $10. The price of corn is up 23% this year.

The governors at the central bank have also become concerned, quite rightly, that banks are passing none of the Fed’s cuts on to consumers or businesses. Mortgages are only given to the most credit-worthy. Financial institution would rather keep cheap money to help build reserves against the next set of write-downs which are likely to come in Q2. Many soothsayers claim that banks are out of the woods. Their stock prices and the worsening housing crisis would portend otherwise.

The cost of money for the main in the street is high and may go higher.

There are almost no reasons for the Fed to cut rates again now and plenty of reasons for it to stand pat. If Bush and Congress are right, they have done something to stimulate the economy. Doing two things at once as the price of everything from Cheerios to bug spray is going up does not increase the chance of inflation.

Inflation is already here.

Douglas A. McIntyre