Recession, Inflation or Stagflation?
Written by Cindy on February 27th, 2008
In my last article I asked the question, “How low will the Fed have to or need to go?” Well, I didn’t expect the surprising 75 basis point reduction followed by another 50 basis point reduction, all within a one week span in late January. A recession is definitely a concern although I haven’t read or heard that we are actually “in a recession”, only that we are heading for or trying to avoid a recession. Now according to a Bloomberg article, the Federal Reserve Bank of St. Louis President William Poole says, “Excessive cuts in interest rates aimed at averting a recession run the risk of accelerating inflation to an ‘unacceptable’ level.”
Here are a few excerpts from Federal Reserve Chairman Ben Bernanke’s statement to the House Committee on February 27th:
“The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries.”
“Consumer price inflation has increased since our previous report, in substantial part because of the steep run-up in the price of oil. Last year, food prices also increased significantly, and the dollar depreciated.”
I would agree with these statements made by Bernanke. It’s the domino effect, one problem leads to another. Are we heading toward a recession, inflation or stagflation? It depends on who you talk to.
So how much lower do you think the Fed will reduce interest rates? I think they will cut at least another 50 basis points at the March meeting. Just about every day I hear or read about the sub-prime lending issues and increasing foreclosures. Who is really to blame? Did we as consumers take too much advantage of the excess cash from refinancing our homes? Is it the foreign markets who kept buying our debt? Or is it the sub-prime mortgage lenders that funded real estate loans with such low teaser rates to qualify the borrower? I’d like to hear what you think.
