Follow Up

So I wrote my last post almost 9 months ago, and I wanted to make a short follow up here. Since then, actually within the last 3 months, there has been an increasing amount of believers that we are indeed entering a recession. They have kicked and screamed and held their breath but now it is getting very hard to deny even for the skeptics. Now we are beginning to see slower consumer spending and and tightening credit. The one thing that hasn't happened yet are the higher interest rates and jobless rate has yet to catch up. Though I think there is great likelihood that 08' will probably hold increasing pressure on jobs and we might see the interest rates tick up, although its hard to say. The uncertainty regarding the interest rate has to do mainly with the interference of the fed. Over the last few months they have taken direct intervention in the market by lowering the short term interest rates. I'm not sure I would have made the same call. Of course they are very nervous about a waning economy and I can understand their concern, but in the course of this action they have also weakened the dollar against almost every other currency. While this change in our exchange rate may slightly assist US based exporters by favoring the price of our goods over those made overseas, it has also and will continue to assist inflation. See the one thing that has kept inflation under control in all these years of historically low interest rates are cheap imports. Though now that we are weakening the dollar in relation to the currencies of these other exporting nations, their products will continue to get more expensive. The clearest example we see this is in the price of oil. Oil is very sensitive to the exchange rates. Though beyond oil we have seen inflation in the price of food and other goods as well. So right when we are getting hit by a recession we are going to have to endure price increases into two of our most important consumer staples, food and energy.
The problem here is the Fed policy of trying to avoid economic slow down till the last possible moment. By keeping interest rates down we will only worsen and prolong the downturn in the economy. The most common catch phrase we see these days in the financial news is "credit crunch". It insinuates that there is demand for credit but the supply just isn't there. In the rest of our economy when there is a lack of supply we increase the price to curb the demand and stimulate the future supply. Well the Fed is doing their darndest to see that this doesn't happen. The ultimate result here will be that only the most credit worthy borrowers will be able to receive loans, and ultimately this will catch up with economy and slow it down anyway, much to the dismay of Bernake and his Fed.