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Thoughts about another emergency rate cut?

fooddude posted on 02/05/08 at 06:30 AM
Seems that anytime the market starts to get weak and sell off, all the talk starts about another Fed emergency cut. These continued cuts stand the strong risk of increasing inflation, weakening the dollar, and driving up commodities further, especially for dollar denominated ones like oil. Even Bernanke must know there is a very real limit to cutting. At least that's my view. The cuts so far have driven food costs so high, that food companies have no choice to pass on all the cost they can. But they still can't pass it all on, and that may be why food companies earnings are down. Or am I all wet??? The cuts try to prop the market, but it really isn't helping, I don't think.
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Posted by fooddude on 02/05/08 at 06:30 AM

Tag It | 1 user tagged it: Fed cuts, commodity prices, dollar, oil, inflation

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UPod

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UPod
Posted February 05, 2008 (07:04AM)

Hi FoodDude, I have to disagree with your argument that:


The cuts so far have driven food costs so high, that food companies have no choice to pass on all the cost they can.

From my point of view, food (and gas) costs were already high and being passed on to the consumer before the rate cuts even took place.
I do agree that food companies have had no choice but to pass on some of their costs to consumers, otherwise their margins would be squeezed. Starbucks is being affected by this big time right now. Dairy prices are pressuring their margins big time. They can no longer pass along costs to their customers. In their most recent earnings call, they mentioned recent price increases have had a negative impact on store traffic.

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snowman

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snowman
Posted February 05, 2008 (07:55PM)
Yes, the cuts help the market. Yes they cause inflation. Yes food companies earnings are down, because of this. No, you are not all wet. The problem is not inflation that has Ben worried, it is deflation. Hyper-inflation would also be a cause for worry. The problem is, once inflation starts it has a snowball affect like deflation does. So there is a fine line between the two. The decision is not Ben Bernanke alone and yes they understand the limits. The limit is you can not go under the inflation rate. 2.7%. If you do, it has a negative affect and will definitely devalue the dollar and cause stagflation at the very least. It would also cause long term interest rates to go up. Which they do not want.
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fooddude

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fooddude
Posted February 07, 2008 (06:06AM)
Upod, you make a good point that food and gas costs were already high. I think that the food cost increase was fueled in a large part by the ethanol boondoggle, which will implode on itself. But you ain't seen nothin' yet. Just wait until to commodity increases start getting passed along. It starts the vicious cycle of higher costs, lower spending, more foreclosures, less spending, lost jobs, etc, etc. Re: the dollar it has gone down a great deal already, and will go lower. I do agree that the Fed is between a rock and a hard place, but I think have no choice but to accept the lesser of 2 evils (higher inflation vs. a worse recession). Thanks for your thoughts.
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fooddude

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fooddude
Posted February 07, 2008 (06:09AM)

Snowman,

How about the fact that although stocks are higher, they are really worth less? So they need to go up just to keep up with inflation. Deflation is a real concern as you noted. It is a very interesting dilemna is it not? But I do not want to be in stocks at this time, at least not on the call side, except to participate in the little bull bounces. How about you? 

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