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Hi
Good point. But I think you read through my messages too fast and misunderstood that the second message had a different subject matter from the first. The FED wants to lower inflation; by no means, do they want an inflation rate of 3-4%. At least that is what I get out of the FED every time Ben opens his mouth (which is not that often). They have an ideal of inflation being under 2%. Maybe, the FED has a legitimate reason to not lower interest rates; an acceleration of inflation might increase the borrowing costs of the government in TIPS, but especially for those who hold I-Bonds (as those who hold I-Bonds receive twice the rate of inflation + a 1-1.2% fixed interest rate). TIPS usually receives the inflation rate + 2.5% (so TIPS do not increase borrowing costs as they would be matched by the rate of inflation).
I had two messages: the Fed's decision and the reason why we should cut rates.
If inflation is hovering even slightly over 2%, lets say 2.2%-2.25%, the FED will raise interest rates because they want inflation of 2% in the market and anything above it, is unacceptable (the reason for the word, obsession). If it is near 2%, the FED might keep rates alone. I don't think the FED would cut rates unless inflation reached 1-1.5%. The market may cut rates if it believes that the economy needs stimulation. For example, the market Federal Funds rate is at 5.22% (three basis points below the FED).
With these low tax rates (the lowest since the early 1930's), the unemployment rate should be 3-3.5% like they are in NH and that would only happen with a 3-4% inflation rate.
The second message stated that rates should be cut so we have a more realistic inflation rate of 3-4%.I think the FED has misplaced priorities and that is why they're going to raise rates; the FED thinks the market is overheated at an inflation rate that is below 2.25%. I don't think you can perfect the employment/inflation line and that the concessions of a rate decrease by .25% to .5% would raise inflation to 3-4% and further improve the economy. A 3-3.5% unemployment rate would be a robust economy; that's an ideal that this FED may not achieve on its own. Other factors will have to be in play that will cause a robust economy (such as a biotech boom). The 4.5% unemployment rate, albeit low, is what I would call an average unemployment rate given the fiscal policy we have in play.
By the way, I'm interested in verifying the accuracy of the Canadian, British (UK), and European interest rates. That would be very helpful as a baseline to see how we compare with the world economy. I also own some I-Bonds, so an inflation rate of 4% would result in a 9% interest rate on my $590 worth of bonds and off course, I would buy more I-Bonds for my emergency fund portfolio.
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