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Stocks actually rose yesterday upon the Federal Reserve’s announcement to drop the Federal Funds rate in between 1/4 of a percent to 0. Still, the move itself signifies the situation we’re in economically. If we were to compare the Federal Reserve to a car without a steering wheel, then raising interest rates would be brakes, while lowering them would be hitting the gas pedal. In this case it looks like the Fed is flooring it.

We haven’t seen interest rates like this, well, ever really. At least not since they began to monitor them. Many economists predict that the rate will go all the way to zero within the month. What does this bring to mind for you?

I’ll tell you what it makes me think. I think the Federal Reserve is scared. I think they messed around trying to build profits and got themselves into a huge mess that they don’t know how to climb out of. Have you noticed how the 700 billion dollar bailout has done pretty much everything BUT loosen up credit- the one thing it was supposed to do? In fact now we’re hearing that credit is tightening up even more so than before. The money was needed to cover up tracks and now that the Fed has just about depleted it’s most powerful tool towards affecting the economy, they’re going to get desperate.

Let’s look at the charts, shall we:

These graphics really tell you the tale way better than I could. As you can see, employment has taken a nosedive. As a result people have cut way back on their spending. This in turn has caused industrial production and capacity utilization (the amount we are using of our manufacturing capacity) both to plummet. Add it all together and we have ourselves a very serious problem.

“From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy,” said former Fed Governor Lyle Gramley, who expects the Fed to spell this out, adding “They are certainly going to have to acknowledge that non-traditional methods are going to be employed aggressively to try to provide assistance to the economy.”

Ah yes, the throw shit at a wall and hope something sticks method. Very effective, a wise choice…

“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.” - Taken from the Federal Reserve’s Dec. 16 press release.

Here’s to hoping it sticks. You can count this man as a skeptic though. As far as I can tell all we’re doing is protecting the status-quo and further weakening the dollar.

Side Note: James Pethokoukis lists his 10 Dopiest Business and Economy Leaders of 2008. Can’t say I disagree with him either.

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