Articles from 06/22/08 to 06/28/08

In deciding today to leave the Fed Funds Target Rate unchanged at 2%, the Federal Reserve’s Open Market Committee brought to an end a dramatic set of rate cuts which began September 18, 2007, when the rate was at 5.25%. The cuts were designed to increase liquidity and ease the credit crunch which developed following the failure of sub-prime loans and the loss of confidence in the mortgage backed securities market. Critics argue that the housing market really hasn’t been helped much by the cuts but that they have added to the inflationary pressures of higher energy prices.

The Fed today signaled that the next move for rates will be up. But it also said its outlook is unusually cloudy at this time.

Stay tuned.

We never get to be inside the room when the Fed’s Open Market Committee is meeting to decide monetary policy. But we have a pretty good idea that the current two day meeting, which ends tomorrow, is a struggle. Congress gave the Federal Reserve two goals, encourage full employment and maintain price stability. This has historically meant unemployment below 5% and inflation about 2.5%. The Fed’s primary tool, interest rates, is not all that difficult to operate. When the economy is growing too fast, the high demand increase inflation, so you raise interest rates to slow demand. When unemployment rises, its generally because the economy (and prices) is stagnant or contracting, so you lower interest rates to stimulate growth.

But what do you do when prices are rising and the economy is stagnant?

Follow the money is a good rule in policing, politics and journalism. So let's see where the ad money is going this election.

To begin with, check out this table from Benchmark media analyst Edward Atorino. The take away here is that broadcasting is still the most powerful way politicians reach voters. It's a proven mass media. That gives station owners clout in Washington and helps explain why politicians are so careful in the care and feeding of local TV journalists.

If you doubt that, just count the number of times John McCain or Barack Obama use your local anchor's name the next time they pop up in an interview in your home town.

But, as with so much in the media, the power is shifting. We can see that in how much money Barack Obama and John McCain are raising on line. We can see it in the YouTube speeches and segments the campaigns are posting online. We can see it in the direct communication with voters the Internet gives the campaigns through blogs and emails.

What’s happening now in the oil markets reminds me of what happened in the housing market after the tech bubble crashed. There were some fundamental changes that were happening in housing: baby boomers buying second homes for retirement, an increase in immigration, and changes in the tax law. But there was also excessive speculation, with TV shows like “Flip this House” marking the phenomenon. Yes, land, unlike stocks, is a limited resource. But as we are learning with the housing crash, the fundamentals did not support the rapid price run-ups.