Some Thoughts on the Stock Market, the Federal Funds Rate, and Economic Stimulus
Published on - January 23rd, 2008 (Modified on - February 18th, 2008) (by J.D. Roth) I avoid discussing national economic issues at Get Rich Slowly because I am woefully unqualified to do so. However, people keep asking for my thoughts. Today I’m making a rare exception to offer my opinion about three topics that may impact your wallet.
Stock market woes
I spoke with Noelle Crombie from The Oregonian yesterday. She wanted my comments on the stock market turmoil. “What should the average person be doing?” she asked.
I hesitated and then said, “Uh, I’m really not qualified to talk about this sort of thing. I’m just an average guy. I’m not a finance professional. All I know is what I’ve read from books.”
“What would the books say?” she asked.
“Well,” I said, “basically nobody knows what the stock market is going to do. I think it’s important to pay attention to the long-term instead of the short-term. In the long term the stock market has increased.”
Crombie was pleasant and the interview went well, but I’m still nervous at being approached as an “expert” on these sorts of things — I’m the last person who should be giving investment advice or making assessments of the national economy.
(Look for more on this topic on Friday — I have an “Ask the Readers” queued on the subject.)
Economic stimulus package
Even my wife wants to hear my opinion on economics. Kris says I should write about the “economic stimulus package” that our politicians are promoting in an effort to avert a recession. The problem is, I don’t have much to say about it. As you may have noticed, I’m not very political. Also, I’m not interested in turning Get Rich Slowly into yet another economics and politics blog. There are plenty of those already. This blog is about personal finance.
If an economic stimulus plan is adopted, and if I receive any direct financial benefit (in the form of a tax refund, for example), I don’t intend to spend the money. Despite what some politicians and pundits say, I don’t believe there’s anything patriotic about spending. The notion baffles me. The two concepts — patriotism and spending — seem completely unrelated.
Fed rate cut
Finally, I don’t really understand Tuesday’s reduction of the federal funds rate to 3.5%. I realize this move is supposed to help mitigate a possible recession. To that end, it’s a good thing. But didn’t I just hear last week that annual inflation in the U.S. was high in 2007? Didn’t I just see an article at Boing Boing about rising food prices? Won’t lowering interest rates exacerbate these problems?
In the short-term, the drop of the federal funds rate actually hurts my personal finances. I have no non-mortgage debt, so the eventual reduction in credit card interest rates doesn’t help me. Fixed-rate mortgages are only indirectly affected by this move, and I’m not sure if they’ll see a significant drop or not. (If they do fall, we may refinance.) Meanwhile, I know that my savings will be earning less interest. ING Direct is now paying just 3.65%, and I’m sure other banks will follow suit.
Final thoughts
I believe the hysterics of the media do more to damage the economy than anything else. I understand that reporters want to engage their audience, but to do so they employ needless hyperbole. They fan the flames of fear. If you’re living within your means, avoiding common financial traps, and exercising sensible habits, you’ll be fine.
Some of my fellow personal finance bloggers have recently offered their thoughts on current events:
- All Financial Matters: Stupidity got us into this mortgage mess
- I Will Teach You to Be Rich: The worst financial advice from around the web
- Blueprint for Financial Prosperity: Worst inflation rate in 17 years
- The Simple Dollar: What does the Fed rate cut mean for me?
How do you feel about economic turmoil in the news? Like me, do you mostly filter it out? Does it worry you? I’d love to hear more from anyone with an actual economics background.
This article is about News
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A recession is 2 consecutive quarters of negative Gross Domestic Product (GDP), however based upon slow housing and decreases in stock values and employment, the economy is slowing. Secondly, we are not in a recession BUT remember our economy is consumer driven. The high debt rates, sub-prime mortgage crisis, lowest personal savings rate since 1933 (-.5%) are going to affect consumer strength.
The government thinks that lowering the cost of money (Fed Funds Rates) and borrowing more money to throw into the hands of consumers to spend will lessen the drop of stock prices and have a positive affect on the economy to save us from a recession. But this never makes sense for the long-term.
The real question may be for people to ask themselves: Are you in a “personal recession?” Is your debt to income ratio too high, are you saving money or living paycheck-to-paycheck? If so, considering the affect the economy may have, it may be wise to reduce debt and spending, but keep an overall positive attitude that the sky isn’t falling.
When all of us consumers start doing a better job of this, we will have more money to spend to make the economy better.
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Jerico: thanks for the interpretive comment. I heard the story about the rogue trader’s $6 billion in bad bets, but did not understand that it was a big part of the Monday declines.
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Daiko
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With respect to ING Direct, you might consider getting an account with Vanguard. My money market account with them is at 4.48%. Obviously that might change with the rate. But it also makes it really easy to move savings in excess of what I planned to save into mutual funds.
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Did anyone see the Republican debate last night? I want to point out I’m not a Rep, never voted for Rep but it was a good debate. Huckabee cracked me up when he said that most people will buy goods imported from China with their rebate, so whose economy would really be stimulated by this rebate, ours or China? As nutty as he is I thought it was one of his saner points.
My biggest hope from the debate was when Romney and maybe Giuliani mentioned allowing those who make under 200K a year to not pay taxes on interest earned on saving accounts–to encourage people to save. Did anyone else catch this? If that happens, I’ll be really excited.
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JD,
First, I’d like to commend you for your very guarded comments. Knowing what you don’t know and being frank about it is a true sign of wisdom. When it comes to the economy, which is really the collective actions of billions of people, the average person knows about 1%. The smarter ones among us probably know about 2-3%. In the grand scheme of things, all of us know next to nothing and yet we have survived just fine. True danger arises when some smart ones think that they know twice as much and begin to offer “answers” and “solutions”.
Second, I did a study of all Fed rate cuts of more than 200bp in history and their subsequent impacts on the stock market. I’d like to share with your blog readers.
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