Oct. 29 (Bloomberg) — The Federal Reserve cut its benchmark interest rate by half a percentage point to 1 percent, matching a half-century low, in an effort to avert the worst U.S. economic downturn in the postwar era.

We U.S. government and Federal Reserve continue to give us signs as to where they stand, where we’re going, and how were going to get there.  Cutting the Fed Funds Rate to 1%, is just one more step towards zero, or next to zero interest rates.

Big Cut, Big Deal, of Big Woop?

This was not a big surprise, and the only question coming into today’s trading day was whether or not it would be a 50 BP or 75 BP cut.  In actuality, the cut wasn’t significant at all.

You see, the Fed Funds Rate is a TARGET rate set by the Federal Reserve.  The actual rate is derived by trading between banks.  This rate usually fluctuates around the actual rate.  In recent weeks, this hasn’t been the case.  In fact, the actual rate has been trading below 1% for some time.

If you’re wondering how this is possible, it’s really pretty simple.  The banks want to either be lenders or borrowers.  By allowing this process to run uninfluenced would mean short term interest rates were set by free markets.  What the Federal Reserve does is enter the market as either supply or demand in order to keep the actual rate around the target rate.  That has not been the case lately.  But all in all, the rate cut was rather irrelevant, because the Fed Funds Rate has been trading below even the new rate of 1% for some time.

Fed’s Out of Control!

Federal Reserve On the Loose

For those who are praising this act as a boost for the economy are kidding themselves.  I’ve never been a believer in the Fed’s ability to drive a multi-trillion dollar economy by manipulating short term interest rates.  That couldn’t be more true in today’s markets.

Not only can the Fed not control the U.S. economy through interest rate manipulation, they can’t even control short term interest rates through interest rate manipulation.  What this does affect are the rates tied to official fed funds rate numbers like savings account rates.

What this doesn’t affect are any of the short term commercial paper markets used to finance economic activity.  In essence, while the Fed is not affecting the interest rate markets, they are reducing savings rates and fueling inflation.

The Fed’s Real Intentions

The Federal Reserve has dug in their heels in the mightiest bought against deflation since the 1930’s.  If they fail, we are looking at deflation that would dwarf that seen in the Great Depression.

In order to be successful in this fight, Bernanke and company will be forced to use all of their monetary tools, and some that were thought not to exist.  The standard monetary tools have included FOMC policy and creation of money and credit.

Some of the more historic measures taken include: massive cumulative bailout, money market security blanket, commercial paper assistance, creation of more lending facilities that one can ever imagine, change in discount lending rules, direct stakes in insurers, direct stakes in banks, nationalization of privatized loss, etc.  I mean at this point you could go on and one.

If it hasn’t come clear to you yet, I don’t know what to say.  THE FEDERAL RESERVE IS ON THE PATH TO HYPERINFLATION.  You need to prepare yourself financially.  Things like social security will be worthless in 10 years.  $100 of goods will soon by you what would have been $10 worth.  All of these things will weigh on us economically with higher interest rates and double digit unemployment.

Nicholas Jones
Analyst, Oxbury Research