Fundamental Review: US Dollar extends losses as Fed cut Interest Rates

Fed Cuts Rates, Pushes On The String
9/18/2007 3:02:00 PM

By Nico Isaac

The subprime mortgage implosion ... the credit crisis ... the housing downturn ... recent comments by former Federal Reserve chairman “El Maestro” Greenspan comparing current economic conditions to those that preceded Black Monday of 1987 ... AND, the most recent blow, the September 7 Labor Department report revealing the first monthly decline in payrolls in four years.

After months of trying to ease the U.S. economy back onto solid ground via more delicate means such as verbal ammunition and cash infusions, the mainstream “experts” agreed: It’s time for the Fed to bring out the Big Guns. And on Tuesday, Sept. 18, they finally did with half-point cuts to the federal funds and discount target rates.

Here's what the experts called for prior to the cuts:

• “The Rubicon has been crossed,” begins one September 7 Reuters. “ With August’s stunningly weak US payrolls number, the door is now wide open for the US Federal Reserve to cut interest rates.”
• “The strongest tool the Fed has for speeding up the economy is interest rate cuts. The US will slow but avoid a serious downturn partly because of aggressive Fed moves to head off such an outcome.”

COURTESY THE SEPTEMBER 2007 FINANCIAL FORECAST CLICK TO ENLARGE

Really? Because history has already told this story, and its message is different: According to historical data, rate cuts haven’t made a lick of difference as far as stimulating the much-needed consumer to spend, the creditor to lend or the corporation to borrow.

This chart shows – as clear as crystal – that the Fed in fact follows the market.

Take, for example, the fact that during the period between 1984 and 1992, the Federal Reserve slashed rates from 11.75% – TO – 3%, a severe cut that did nothing to prevent the worst stock market collapse since the Great Depression in October 1987, record-high unemployment, a debilitating savings and loans crisis, slow GDP, and economic recession.

Similarly, a Federal Reserve rate cut from 6.5% – To – 1.25% from 2000 to 2002 proved impotent against the longest stock market decline since the Great Depression, the tech-bubble bursting, and a brief economic recession.

(Please Note: From June 2004 to June 2006, the Central Bank RAISED rates from a half-century low of 1% – TO – 5.25%, an equally futile effort to tighten the spigot of easy money and remove the froth from the bubbling housing market before it burst.)

In the words of Bob Prechter, from Chapter 13 of his best-selling Conquer the Crash, the “monetary strategy” of lowering the Federal Funds Rate is about as effective as “pushing on a string.”

And, in the September 2007 Elliott Wave Financial Forecast, our analysts begin with a special section titled “Unwonderful Wizardry Of The Fed.” In this exclusive segment, EWFF presents a powerful glimpse into the Central Banks actions in the wake of the 20^th Century’s Greatest Stock Market Manias, showing once and for all the inability of the Fed to “pump life back into the market with a succession of rate cuts.”

The Financial Forecast’s bottom line: “Blind faith in the Fed’s power to hold up the economy and stocks” has dangerous consequences; namely, that investors don’t see what’s directly in front of them before it’s too late.

(Quote From: Elliot Wave International (EWI) )