Wednesday, January 30, 2008

Another Half Percent

As expected, the Fed cut rates by ½ percent today bringing a rally in the afternoon market. The cut is not likely to act as an immediate antidote to the larger economic issues in plaguing the economy. There is always a lag before an interest rate remedy works itself through the business chain. This implies that the unprecedented rate cut of 1.25% over just a few days will not slow the pace towards a probable recession.

Some pundits question if these emergency rate cuts are useful or will simply drive new asset bubbles. The economy exhibited the worse economic growth in five years during the 4th quarter, only growing at a mere 0.6% rate. Some reports claim that the U.S. will avoid recession, while commentary today from Alan Greenspan indicates that we may already be in a recession. Hopefully the rate cuts will enable the recovery from a faltering economy down the road.

Other news stories at the top of the press show that broader economic concerns remain despite the action of the Fed. Sallie Mae (SLM) secured $31 billion in financing Monday; this did not however boost the stock or quiet the skeptics of this student loan entity. Even with the addition of this cash, the slide of Sallie Mae is likely to continue.

The collateral damage from the U.S. troubles continues to spread increasing the probability of a global recession. Internationally housing still looks bleak; many real estate markets have folded over outside of the U.S. One recent article (U.K. Housing Market Cracks) outlined the situation across the Atlantic.

Rising unemployment, higher prices, housing concerns, retirement plan anxiety, and weakening business outlook have weighed on U.S. consumer confidence. Most consumers are negative on conditions and are slowing their spending in response. This problem is reflected in the slowing activity that retailers are seeing at the store-front in January after a weak holiday spending season. In the end it will be the consumer, representing two-thirds of the economy, who will either drive the U.S. into recession or save us from one.