Tuesday, August 07, 2007

Jim Cramer On Rate Cuts

While the formal outcome of today's FOMC meeting is more or less a foregone conclusion (Fed will leave rates unchanged), the short-term direction of the stock- and bond markets will be decided by the wording of the accompaning statement. The Fed is an institution so powerful that a single word in a statement could destroy or create hundreds of billions of dollars in financial wealth. The key is whether or not they will open for rate cuts in the near future. If they do, stocks and bonds will rally. If they don't and instead continue to emphasize inflation as a greater threat than weak growth there will be a sell-off in the bond market and probably even more in the stock market.

Most statements from Fed officials indicate they will basically leave statements, but it cannot be ruled out that the increased anxiety over the subprime mess and the risk of a recession have caused them to change their minds.

Someone who's mental health will be in great jeopardy if they leave the statement unchanged is Jim Cramer, host of CNBC show "Hard Money". His buddies at some of the subprime banks are losing money and that is making him very upset and makes him lose anything resembling objectivity and rationality. The female host looks rather shocked and embarrased by his performance. Watch it for yourself here:


Blogger Flavian said...

I think that one factor that perhaps is overseen is that rate cuts may fuel fears for inflation and thus send prices of bonds and stock down.

If there is confidence in the future value of the dollar, long-term interest rates would fall and make share prices soar.

I believe that part of the weakness of the US economy is due to the fact that there is lack of confidence in the currency, with the result that lenders ask for higher rates and depress the economy.

Stagflation is the word. The correct remedy is tightening of monetary policies in order to restore confidence in the future value of the dollar. That would remove uncertainty and restore economic growth.

It would probably also lower prices more than it would reduce the nominal quantity of money with the result that the real money supply would expand in response to a tightening of monetary policies.

Economic growth is nothing but a growth in the real price-adjusted money supply. In that sense the money supply may at the moment actually, due to easy money, be contracting.

8:22 PM  
Blogger stefankarlsson said...

Well, you are partially right. In the long term, tightening monetary policy would be better for the economy as it would remove the distortions created by Greenspan.

However, this would create some short-term pain, particularly for Jim Kramer's rich Wall Street buddies and would so make him even more hysterical.

8:45 PM  

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