Fed Cuts Interest Rate, Inflation, and the Next Bubble

Fed Cuts Interest Rate - Inflation

The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.

“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital Research.com.

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Not only is fed making the dollar free to borrow with the fed rate going to zero the fed is now directly participating in the market by buying securities such as government debt, mortgages, commercial loans, even stocks. Wow! They really want to force their dollars into the market any way possible. It’s funny that they are issuing dollars, which is basically US debt, to buy government debt.

What the fed is doing here is setting up the groundwork for the next great bubble. Remember, it was easy money that got us in the mess in the first place and the government forcing banks to make home loans to people that had little ability to pay for them. As long as the fed can continue to keep printing, there will continue to be larger and larger booms and busts. All the market needs now is confidence of the people. When you combine confidence with all the cash sitting on the sidelines and the money that the fed is flowing into the market plus the $1 trillion that Obama wants to spend once he’s in office… we will have the next great bubble begin to form, unless the fed pulls the money back out fast enough, but their will be great pressure on them to leave it alone and Bernanke does not have the reputation of being a fan of a strong dollar. However, with everything in the market, there are winners and losers.

Some of the winners in this case will be US manufacturers, banks, US exporters and people that owe a bunch in US dollars. The biggest losers will be people with their savings in cash and people on fixed income. The more dollars the fed pumps into the market, the riskier it is to keep your savings all in cash, as inflation will return eventually and the prices of everything we buy will skyrocket, such as fuel, metals, wheat, corn, etc. It would be better to put some of it into non-depreciating assets that have real value (if you haven’t already), such as high quality stocks, silver, gold, real estate, etc., especially at current prices. You have to be defensive against the Fed’s actions.

Looking for a good local opportunity? I recently picked up some shares of Merchant’s Bank (MBVT). They are based here in Vermont. They will benefit from the free money they can borrow and then resell, they pay a great dividend (around 5.56% as of today) and they didn’t have exposure to the sub prime mortgages. I got some shares at $18/share. Trading has been a little volatile lately. I’m looking to get more between the $17-$19 range.

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