The addict got his drug... - Views on News from Equitymaster

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The addict got his drug...

Dec 12, 2007

...or so it seemed! But seemingly, he wanted more of it. With the druggist refraining to give him that extra dose, citing concerns of a hangover, the addict went berserk! Or so it seemed! To cut the long story short, the druggist (the US Federal Reserve) in its monetary policy meeting (drug delivery session) yesterday, decided to lower the federal funds' rate by 25 basis points (0.25%) to 4.25%.This is 1% lower then the pre-September fed rate of 5.25%, when the US central bank first thought about releasing the dosages of cheap money into an already gluttonous and insane financial system (the addict).

Here are yesterday's policy statements from the Fed in their entirety -
"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

These statements are testimony to the confusion that the US monetary policy has created, with its members being concerned both about a slowing economy (requiring interest rate cuts) and inflationary pressures (requiring interest rate hikes). But, so far, the central bank has decided to go with the financial system, which is in need of cheap credit, and more of it. And another big irony of the entire situation is that this very financial system cheers when there are signs of economic growth (like strong employment numbers), which warrant an interest rate hike, and sulks when the Fed does not reduce the rates at a faster pace!

"You do anything long enough to escape the habit of livinguntil the escape becomes the habit," said David Ryan. Probably, nothing else could sum up the scenario in the global financial system. Here, investors have been habituated to seeing asset prices rise on the back of cheap funds that any sign of money getting expensive or 'not getting cheaper fast enough' leads to panic like situation. The US markets of yesterday and the Asian markets make this point clearer.

"Every form of addiction is bad, no matter whether the narcotic be alcohol or morphine or idealism...or money," said Carl Gustav. Well, the 'money' part comes from us.

Have a safe and addiction-free investing!

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