Newsletter – November / December 2006 – Fed Up, Fed Down


Fed Up, Fed Down

The US Federal Reserve Board [“The Fed”] is the single most influential economic force in the world. Its mandate is to maintain growth and stability in the biggest economy in the world.

“Fed watchers” are economic analysts who try to forecast various economic trends by interpreting the constantly changing policies of the US Federal Reserve Board. This is what they observed in 2006:

  1. The US housing market had become an arena for speculation. Prices were soaring. People were paying record high prices, buying with HUGE mortgages. It was a buying and mortgaging frenzy.
  2. The Fed wanted to prevent this speculative housing boom from exploding into a bust. They increased US interest rates 17 times in a row in an attempt to cool things down.
  3. Finally the Fed succeeded. [They always succeed.] US house prices are cooling down to more “normal” levels.
  4. Spin-off effect. It is very difficult [impossible?] for the Fed to cool off just one segment of the economy. In the economic world, everything is connected to everything else. Now Fed watchers are worried that the stock market might cool off too. And, worse yet, the whole economy might cool off too. [A “too cool” economy is a recession: a “way too cool” economy is a depression.] Note for Canadians: if the US economy cools off, our economy cools off too – in a big way. Their problem is our problem.]
  5. In January 2007 the Fed watching economists will be out in full force with their annual forecasts for the New Year. What will the economy do, and what will the stock market do? Some will forecast a “soft landing:” the economy will cool off a little, but will not slip into a recession. Other forecasters will predict a “hard landing:” the economy will cool off a lot and a recession will ensue. Both soft and hard landing forecasters will predict that the economy will recover in 2008, just on time for the presidential election.
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