Thursday, February 17, 2005

Lesson in Interest Rates

The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. In the US, the Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy.

The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee (FOMC) is responsible for open market operations.

I'm absolutely fed up with the obnoxious state of the real estate market and have been trying to understand what the dynamics are for what I believe to be a state of hubris. Wait, haven't we seen this before. Well, I'm particularly interested in this industry because I've been pounding the pavement in Manhattan and it's out of control. And, I think one of the main issues is interest rates (and, there are a lot of combining forces here).

The FOMC's most recent hike leaves the federal funds rate at 2.5% ---- pretty low by historical standards and in relation to inflations, but up 1.5% in the past seven months. I don't share the same view as the Fed because I belive that we're tilted toward higher inflation rather than stability. We've got gradually rising cost pressure at the commodity and compensation level and this continues to push core inflation gradually higher. In my opinion, the surveys suggesting stable long-term inflation considerations are out of whack, unless the Fed does something about it.

Short term rates are obviously higher, stock prices are higher, long-term yields and the dollar have declined, and credit is more available. What do you think?

posted by Charles @ Thursday, February 17, 2005