Making a "FED"eral Case for Free Money...

Today, the Ben's Den let out the big roar and applied the big bite....the question is whether they have bitten off more than they could chew.

From the FOMC minutes:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further......The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.....In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent."

This is basically the Japanese style of flooding the market with money to reflate the market. The lesson learnt is that even with such low interest rates for many years, it has done very little to grow the economy, and had the really bad effect of spawning the "Yen-XYZ" carry trade- borrowing in Yen and lending in higher yielding currencies. Now the Japanese, who lent the money to American banks who then lent to U.S. residents, are losing "interest." It is also hurting their exports, as the unwinding of the carry trade means demand for local currency.

Ben is assuming and deploying immense powers- of printing paper and throwing it around, but he cannot create fundamental demand. Nor can he change the cultural shift happening in the country. Adults and children are becoming more "conservation" conscious, and more thoughtful. This game will be played out for many years to come...