I do know that dollar was dropping in 1987. And if I recall
Fed had reduced rates ( I am not certain about that).
Rates had been cut three times before Oct. 19, 1987.
The thing to get about interest rates now versus 1987 is not the percentages themselves but, where they are going. If the Fed brings the Fed rate down further, the dollar, which is already historically low versus other currencies, goes even lower. That raises inflation which means the Fed will have to raise rates IF a low inflation economy is really Bernake's main concern. The cost of oil is going to be inflationary as it is.
If short term rates go down, long term rates go up. Mortgage rates go up, those pre-foreclosure folks can't sell their homes because there are less buyers, more foreclosures, bigger drop in home prices for all, more defaulting CDO's etc., etc.,...well, you get the picture. It goes round and round spreading debt and default exponentially in a spiral of death.
Have a nice day! 
I think the idea here is to lower rates in an attempt to pump things up, then raise rates later as the economy firms in order to fight inflation. Kind of like threading a needle admittedly...I'm not saying it will work or not. But I think that's the attempt. And too, I think they may be worrying about the affects of the real estate market, and what impact that will ultimately bring later on. Amidst those concerns I would imagine that the dollar takes a back seat...if it ever had a front seat.
Will mortgage rates go up? They are going down right now. Is oil inflationary? So far the answer is no. I mean, let's face it, oil has gone from 20 to 90 without an increase in the inflation numbers. And too, to the extent that we are concerned about adjustable rate mortgages and their resets, you want short rates lower since that's what the resets are based on.
Might be interesting to know what your suggestion is....raise rates into a slowing economy? That's been the prescription for a crises every time it's been tried.
IT
In re to Bernake's, I almost described it in the post above as "dancing on a razor blade" and then decided to edit it. Unless he lowers rates to at most 3.75%, as Bill Gross at PIMCO wants, and holds them there a while, the rate lowering is not really going to do much. Right now it's more of a political mollification to the Wall Street crowd that isn't really going to do much substantially for the credit problem. It's certainly not going to help the subprime lenders. Nor will it help the sub-prime borrower since the drop in value of their home precludes them from being able to refi into a fixed mortgage anyway. Another quarter to half percent cut isn't going to do it either. It did pop the equity markets but, that's going to be, like in 1987 even though circumstances were specifically different, a problem for the general market shortly if not already.
At the two banks I use for following mortgage rates (30-year fixed), Wells Fargo and Citibank, the rates have been going either one-eighth up or one-eighth down for almost a year now. Not much change. Yesterday's change at Wells, down to 6.25 is the lowest I recall seeing it for all of 2007. Still, houses in many parts of the country are going down due to a lack of qualified (non-subprime) borrowers and foreclosures.
Gas at the pump has not reflected the jump in oil prices lately because reserves have gone up. It will soon though and IF the Turks cross the Iraqi border to go after the Kurds as they seem to be spoiling to do, I expect oil to go up 20% per barrel no matter what price it is at gas at the pump will reflect it as well. I expect to see gas going up to at least $3.75-3.90 by Christmas. Also, this winter, according to many almanacs, is going to be one of the coldest in some time, heating oil will be selling higher to those who haven't already set their contracts I expect. I'm not that well versed in how that works though.
Due to the way the government figures inflation, CSRS retirees just got a COLA raise of 2.3%, FERS, 2%. FECA COLA might come in at 3.4% but, that will not be known until January. How much do you see only going up 3.4% this year at your grocery store? I've been seeing beef, dairy and produce going up more than that in the northeast.
My suggestion as to what to do? I don't know. I do know there is going to be a lot of pain due to irresponsible lending. That our standing in the international economic community is going to suffer greatly due to these CDO's we've sold to them which are worth less and less everyday with every foreclosure even though nobody knows what they are actually worth. That those who are responsible savers are already being penalized in their money markets by those who borrowed irresponsibly. That the money markets themselves could conceivably go under due to the fact that some of them hold collapsing ABCP.
From time to time in various posts here when a downturn in the market is predicted by one contributor or another, someone invariably replies that we should hide in the basement, head for the hills or bar the doors. I profit in up markets. I profit in down markets and I profit in markets that go nowhere. That is our business - to profit in the market - any market.
It doesn't matter where the train is going or how fast as long as you are on the train.
Regards,
Of course Doug. nothing I've posted about this weekend has anything to do with the trading I do Monday through Friday from 9 to 4. It does have something to do with what I do with some of my earnings in my personal life (See: my earlier post regarding potato chips. See: my post on the Price Of Beer thread
) This is just, for anyone posting on these types of threads, intellectual stimulation, or masturbastion if you prefer. :Light:
Edited by milbank, 20 October 2007 - 06:18 PM.
