10 Reasons To Leave Rates Alone

Alan Greenspan, while he states he wasn't fully aware of the mess that he was causing in the mortgage markets, in his new book states the Fed will have to hike rates to 10% to fight off inflation by 2010. And you know what? For once, the old goon is right.

But in the meantime, Tuesday the FOMC meets and is widely expected to reduce the rate from 5.25% to 5%. I have seen a number of analysts call for a .50 decrease in the rate to "jump start" the economy.

I have a number of issues with the whole reasoning for a rate decrease.

1) Outside financials, certain hedge funds, and builders, where is the fire? Retail sales, have been inconsistent, but not bad. Techs are doing well. The Dow, Nasdaq, and S&P are all showing gains so far this year. So, why cut?

2) Unemployment numbers have stayed consistent at around 4.6%. This historically is a good low number showing high resource utilization. Yes, the jobs figures for August showed a decrease of 4,000 and June and July numbers were revised downward but a few more months worth of data is needed to determine if this is truly a trend or a financial/construction fallout.

3) The dollar is hovering around it's lows against the euro. A rate cut here will put further downward pressure on the dollar. Want to know why gold has made another run as of late? There it is. A lower dollar pushes investors into gold.

4) Inflation is just inside the Fed's target rate of 1-2%. Just because we are inside the magic 2% number doesn't mean that inflation is under control. Remember, that range does not include food or energy prices. Anyone taken a look at those in the last 6 months or so. Oil eclipsed $80 a barrel this week for the first time. I invite anyone to go to the grocery store and get as much food as they could just a year ago for the same amount of money. It won't happen. That is inflation too, it just is more volitile and that is why it is stripped out of the Fed's core numbers. And believe me, the Fed is aware what I like to call "beer inflation". A cost of my favorite 24 pack is up at least $2 over what I was paying last year.

5) GDP grew in Q2 over Q1, right? We won't know what Q3 will look like until the end of October but the most recent earnings season just ended and prospects for the up coming earnings look good too. I know that I mentioned it in this space before but have you noticed that for all the hoopla the financial sector has been making, not one of them has issued an earnings warning? Weird huh?

6) A cut will not fix all the current ills of the mortgage market. A .25 or .50 cut will leave no dent. Mortgage rates move in anticipation of what the Fed will do (so you won't see a big drop in rates after the announcement) and the market still stinks. Too many people are on the sidelines and are willing to stay put rather than risk buying a home today that will be worth less tomorrow.

7) So who does this really benefit? The investors and speculators that are accustomed to 30% plus gains each year and unfortunately are having a bad year. They are the ones screaming the loudest about the ugliness of the situation. Guess what? I don't feel sorry for them. Do you?

8) And finally, the worst one...the president would like the mortgage mess all figured out and in the past for the next election. A rate cut now, which would take between 6 to 9 months to filter through the system will be in full impact by next November's election.

9) You can't bandage the wound by throwing money at it. We all know that the issues we face now is an indirect result of the tech bubble bursting. If we bail everyone out with rate cuts now, a new bubble will form somewhere else and inflation will rise. Ultimately, someday down the road, inflation will be out of control and we will have a Volcker moment. Just like the one Alan Greenspan expects in his book.

10) Can we really afford to see Greenspan be correct on this? Do we really want to suffer with a 10% Fed rate...which will correlate to prime rate being 12%? If the Fed just stays put at this time, maybe we can avoid that in the future.

I'm not totally against a rate cut. I just think that more data that truly points to a rate cut need actually manifesting before one is done. Will that be too late to avoid recession? Maybe, maybe not. But if rates have to be hiked to 10% to fight inflation, we will have a recession then, and a long and deep one at that. A little recession now can be a large amount of cure later.