Thursday, 1 November 2007

US Fed Cuts Interest Rate in Order to Keep US Stock Market Afloat.

The Federal Reserve, confronted with surging oil prices and a slumping housing market, on Wednesday cut a key interest rate by a quarter-point, the second rate reduction this year.

The central bank lowered the federal funds rate to 4.5 percent in an effort to stimulate economic activity and keep the country from dipping into a recession. The move will make it cheaper for consumers and businesses to borrow money.

The cut in US interest rates is also causing the US currency value to drop. Money is going out of the country in search of higher rates. A strong economy (or Stock Market) would not require such extensive rate cuts. The US dollars' value cannot be as high as claimed and it is being sold off.

What is happening is that the big lenders on Wall Street are getting bailed out with cheap money to keep themselves solvent. Pointedly, if not for generous Federal Reserve Bank loans a number of US financial Institutions would already be out of business due to the sub-prime loan fiasco. The high end of town is looking after itself.

However, there are severe consequences for a having weak US dollar. Imports into the US will cost more. The USA imports about 65% of its oil. A weak dollar is like a tax on oil which consumers will have to pay for as the price goes up. Transportation costs will rise and therefore so will the price of goods and services that rely on trucks and vans. Likewise, people who own cars will be hit with higher fuel costs. Goods from China will gradually become more expensive- almost everything in Wal Mart is made in China.

The poor and the middle class, people without much extra income, will take a hit and the underlying consumer economy will slow. The US economy is in a fix.

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