VodkaPundit

Money

While I was off doing the important business of showering and shaving and getting a haircut, the Fed cut the overnight rate a half point.

Wow.

Not because I think it will prove a great stimulant to the economy — I don’t. Consumer credit is reaching a saturation point, and so is the housing market, even with cheaper money.

Less certainty — a, ahem, certainty during war — means more savings, and that’s mostly what people will do with lower credit card bills or mortgage payments. Better to put some money aside for tomorrow, instead of using those smaller monthly payments to rack up yet more debt. And without extra consumption, business will remain wary of increasing capacity (already glutted) or employment rolls (declining again).

Not even increased Pentagon procurement can make much of a difference in aggregate demand.

Don’t get me wrong, I think the economy is doing OK (but just OK) now. What I worry about is next year, when there’s a small but real chance that things could be worse. The federal funds rate is already at a mere 1.25%, which means that if a real recession comes, the Fed can repeat today’s cuts only two and a half more times.

In other words, the Fed might just have used their biggest gun too early in the battle.

On balance, I’m still an optimist on the amazingly resilient American economy. But I’ll be keeping a strong cash position, just in case.