Fed predicts the worst is yet to come
May 21, 2008 by Tisa Silver
Filed under Finance
The Fed stated that it expects the economy to shrink during the first half of 2008.
This announcement should come as no surprise, as in recent months the Fed has actively moved to stave off a recession. Even though the Fed has been reluctant to admit the severity of economy’s struggles, actions speak louder than words.
The minutes of their most recent meeting reveal raised expectations for unemployment and inflation. Food and energy prices are by far the most obvious inflation concerns, but excluding both, the Fed still expects inflation to rise.
Many blame the Fed’s recent string of rate cuts for weakening the dollar and pumping up oil prices.
There is no doubt that the Fed’s policy decisions have consequences for securities in every asset class: stocks, bonds, and derivatives. Did the Fed respond early enough to fend off economic downturn or was the series of interest rate cuts too little (or too much) too late?
Those fighting the raising oil prices need to face the reality that price would rise in the long run despite the fed’s actions, because oil is a commodity that is being consumed at an unsustainable rate. Positives of the high prices would be the promotion of alternative sources of fuel and energy.
It probably is true that the worst is yet to come. The interest cuts they have made are not helping much and unemployment is rising. They need to come up with something drastic to change our economy around..sooner rather than later.
The first half will indeed be a rough one in 2008. To play the numbers card, we experience a recession roughly every 75 months. It just so happens this is about how long it had been since the country’s last recession. The times we are in right now should come as no surprise. Sure inflation is digging an ever growing hole in everyone’s pockets but recessionary times are expected, especially now. The Fed will do as it sees fit to bring us back to stabler times in the near future…hopefully.
It is true that unemployment and inflation continue to rise however, the Fed’s decision to conintinually cut rates is aimed to relieve these problems. It may appear that these rate cuts are not helping but unemployment and inflation are now rising at a lower rate. Also, many experts believe that the rate cuts will end at the next FOMC June meeting.
Other issues the Fed should worry about in their reports are the increasing oil prices. They are projected to be between $150 and $200 by year end. Will the prices cause stagflation? The fed is trying to boost the economy but increasing oil prices may prevent this.
Unfortunately, it seems as though this assumption is absolutely correct. With inflation and unemployment on the rise, the wall the economy must overcome is only growing taller. In response to an earlier blog, alternative sources for fuel and energy seem to be initiating positive growth in other markets. I would love to hear your thoughts on the response of the agricultural market to the “going green” philosophy our nation seems to be promoting.
Inflation more than production is definitely more responsible for the rise in energy and food costs. Although food production is also down because of farmland used for ethanol corn. The price of gas is up nearly 60 cents compared to Memorial weekend of last year and it’s hard for me to believe that production alone would cause such an increase. Also, the Fed always responds too late, it’s like the head goose that flies to the front when it sees the flock turning direction. Hopefully the weakened dollar will benefit our trade deficits in the long run other than that it’s going to be ‘inconvenient’ to say the least for the average consumer.
I think that although there are expectations of an increase in unemployment and inflation, there will be a turnaround in the economy in 2008 due to the rate cuts by the FED. The US economy will return to a period of prosperity in the near future.