Even thought the Fed acted quickly and lowered the interest rate, the economy is heading for a recession caused by fundamental problems in the economy. Even with? a series of rate cuts, the? economy will be dealing? with the fallout from these problems well into next year.
- Lowered interest rates 50 basis points down to 4.75% means pushing the chance of inflation near new highs
- Home foreclosures soar 36 percent in August leading to a drop in home values causing further? drops in? consumer spending
- The credit market continues to dry as liquidity freezes leading to a further? shortage? of commercial paper
- Economist increase the chance of recession from 25% to 35% or a 1 in 3 odds of recession meaning confidence is failing
- Wholesale prices tumble 1.4% in August, while core prices were up 0.2% an indication of deflation causing business confidence to fail as well
- Oil prices surge to new highs touching $81 dollars a barrel making consumers cut spending
Housing is the main consern for the economy right now. With foreclosures soaring, the housing crunch will get much worst before getting better. So, the U.S. economy still has difficult seas to navigate in the months to come.
“The recession in housing shows no sign of ending, undercutting the momentum of the economy,” says Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. “We are likely to see consumer spending slow down.” And because consumer spending accounts for more than two-thirds of U.S. economic activity, it is extremely important to growth.
Earlier this month the Labor Department reported the first monthly loss of jobs in four years. In August, employers eliminated 4,000 jobs signaling a new trend in the weakness of the economy.
Furthermore, the recent rate cut will take months to translate into economic growth, and we’re at a time when we don’t have months. A half-point rate change won’t effect banks extending credit, consumer spending, investments, and exports because banks are still? fearing defaults. Thus the fear spills over into consumer spending, investing, and exports.
As recent as six-weeks ago, the central bank indicated inflation remains a “predominant concern.”