FED Funds Rate
Last Sunday, I had the honor to lead an economic discussion with a group of economyguy readers and friends. This group of highly educated and financially sophisticated individuals represented the core values that investors across America have. As individuals, they were interested in all types of investments, and we interested in how the future US economy will affect those investments. This was a very stimulating and fun get-together, and I can say that it is very encouraging for me to see the thoughtfulness that these people put into their investments.
Everything went sideways today, except the Dollar which strengthened significantly. Now it is surprising that no other markets moved in sympathy with the US Dollar – they have in the past. So, if they didn’t move today, watch out for tomorrow. The moves could be significant. Which direction, you ask? Down in the DOW and down in gold, oil, gasoline. Bonds are fickle, and harder to call.
In the news today……
2010 Budget Deficit – is projected to be $1.35TRILLION, and this is compared to the 2009 deficit of $1.4TRILLION. This presents a massive problem for the US, as we must pay for this deficit by selling bonds, and who is going to buy them? I suspect that foreign money is drying up, and that less and less foreign nations will buy the US Debt. There are discussions in Congress and the White House to require your 401K and IRA buy these bonds – and fight any suggestion of this with your last breath as it is a big con.
Ukraine Election – will happen in a week, and will result (whichever Presidential candidate wins) in a reversal of the Ukraine independence movement, and a discussion on how the Ukraine can reunite with Russia. I am highlighting this event as it shows how Russia is increasing in real influence in the world. Russia is a force to reckon with, and will be more so in the future.
Japan downgraded – as their debt to GDP ratio is expected to grow to 115% over the next couple of years. Japan has one of the highest debt obligations of any 3rd world country, and is showing the inability to have policy flexibility sufficient to deal with their debt. In my opinion, this is the first sign of Japan slipping down the slope of economic destruction and malaise.
China – told some of its bank to stop lending for the remainder of the month, and is increasing bank reserve requirements. The reserve requirement increase will have the effect of slowing loans, as banks must keep more of its money as reserves. This is all part of the Chinese management of its economy which is considered to be overheated – so China is cooling it off.
AIG being investigated – again, and this time by the TARP special investigator. The key character, front and center, is Tim Geithner, our Secretary of the Treasury, when he was head of the NY FED during the bailouts – and AIG’s in particular. There will probably be new leaks of what actually happened, and this will be bad news for poor old Tim.
Headline News…..
The FED will consider dropping the FED Funds Rate at its next FOMC (FED Open Market Meeting). They are talking about replacing the FED Funds Rate with an interest rate associated with the interest paid on excess bank reserves. The FED Funds rate has been around for the past 20 years.
I naturally get suspicious when any governmental body wants to change the rules and measures we use. So, I will be looking for the meaning behind the change.
If any of you have some insight, I would appreciate hearing from you.
Here are the last numbers for today:
Dow Jones 30 Industrial – 10,194 (down 3)
10 Year Treasury Bond – 3.63% (no change)
Euro – $1.4077 – down almost a cent.
Gold – $1093 (down $2)
Oil – $74.59 (down $0.57)
Gasoline – $1.97 (down $0.03)