US Economy and Globalization Part 1 of 17

Recent Developments in the U.S. Credit Markets

You are all well aware of the events that began to rattle the credit markets in August. Indeed, the media and analyst coverage of the market turbulence Apogee has been so extensive that you would have had to have gotten lost on the walking tour around Ayers Rock last July and just now found your way back to civilization to be unaware of subprime mortgages, collateralized debt obligations (CDOs), structured investment vehicles (SIVs) and the write-downs taken by several leading financial institutions. The disruptions to the orderly functioning of the financial markets have been significant, and the Fed and other central banks around the world have acted to keep those markets functioning. Beyond the troubles in financial markets, we have had an otherwise healthy economy in the U.S., with, thus far, the only other significant signs of weakening coming from continual corrections in the housing market.

The Federal Reserve took action in mid-August, first lowering the discount rate by a half percentage point at a specially convened session of the FOMC, making clear we, like all learned central bankers Trading for Beginners, had read Walter Bagehot. Then, at our regular September meeting, we cut the federal funds rate by a half percentage point and the discount rate by the same amount.

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Balancing Inflation and Growth Part 7 of 13

At the same time, I am fully aware that the FOMC must be careful to not undermine that recuperative process. Here, of course, I refer to the potential harm to the consumer and the business and future trading software financial sectors alike by unwittingly allowing the perception to take hold that, as the New York Times editorialized in its lead front page article last Thursday, the Federal Reserve, signaled its readiness to bolster the economy with cheaper money even though inflation is picking up speed.

Talk of cheap money makes my skin crawl. The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it. So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy and commodity trading education, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy.

I believe the Times overstates its case. Chairman Bernanke made clear in his congressional testimony last week that we are monitoring inflationary pressures and expectations closely. And yet, I understand the source of the Times sentiment. In a globalized capital market where money is free to move anywhere it pleases, there is scant tolerance for even the slightest whiff of inflation. Since the January FOMC meeting, longer-term rates, including those on fixed mortgages, have risen rather than followed the federal funds rate downward.

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