Fasten your seltbelts, it’s going to be a bumpy night

Get rid of your variable rate loans quickly and hold on to your jobs. The Fed’s about to raise rates.  Bernanke and Paulson continue the tango to deal with the economy.  Today’s news brought a record, whopping exchange rate for the Euro against the dollar and at the moment the Dow Jones Average is down triple digits.  If I thought my morning coffee and blogging was going to be quiet, I was wrong.  What’s going on in the financial markets right now is to economists as Hurricane Katrina was to meteorologists.  This is as big as it gets.   So here’s the most interesting of all my MarketWatch updates this morning.

source:  http://www.marketwatch.com/   (This is site is affliated with the WSJ)

WASHINGTON (MarketWatch) – The potential for runaway price hikes is the top concern of Federal Reserve policymakers, according to testimony by Fed chairman Ben Bernanke and the accompanying report on the economic outlook of his colleagues on the central bank released Tuesday. FOMC members were more uncomfortable about the inflation outlook in June than they had been at any point in the year, according to the Fed’s monetary report to Congress. The Fed is worried that high oil prices, combined with the weak dollar, will increase business costs and prices. At the same time, it could make workers demand higher compensation because of the more expensive cost of living. As a result, most Fed members viewed the possibility that inflation could come in higher than expected in coming months.

I’ve been telling my students for months that interest rate drops were going to stop. I was rather suprised by the last one.  However, problems in the housing market were trumping the higher inflation rates indicated by the CPI and the Fed’s preferred measure the CPE.  Evidently, the Fed has decided that rising prices are more of a danger than a recession and have just announced in a big way there will be no more rate drops.  My guess is they will quietly and slowly start pulling money out of the economy.  Usually this is done with a series of open market sales of treasury bills by the fed.  As the increased demand for the bonds/bills drives bond prices down, it will drive interest rates up.

So this market watch bulletin was followed by two other ones pretty quickly.  One stated that GM was suspending dividends–something highly unusual for this type of stock.  Also, it is cutting 20% of salary costs to boost it’s liquidity.  This undoubtedly means either a hiring freeze or more layoffs.  It’s possible it could be elimination of bonuses or salary cuts.  Either way, it’s more bad news for the Michigan.

Then there was this next big of information.  Did i mention my email box was full of MarketWatches today?

WASHINGTON (MarketWatch) – U.S. retail sales rose a disappointing 0.1% in June despite nearly $50 billion in stimulus checks for consumers, Commerce Department data released Tuesday revealed. Sales were boosted by higher prices for gasoline, food and other consumer goods. The figures are seasonally adjusted but are not adjusted for inflation. It was the weakest sales since February’s 0.2% decline. Sales in June were held back by the biggest drop in auto sales in more than two years. By contrast, sales at the malls and shopping centers were relatively healthy, stimulated by the tax rebate checks, Excluding the 3.3% drop in auto sales, sales rose 0.8%, the slowest in three months.   

That didn’t surprise me at all.  Rebates are usually the worst way to stimulate the economy.  Most of them wind up paying off already purchased items.  How many of you used the checks to pay down a credit card?

What continues to amaze me in all of this is the topics in political debate.  The candidates are not getting that it’s the economy stupid! Obama is giving a ‘major’ speech on Iraq.  McCain was out speaking to the Latino vote on immigration yesterday.  Somebody needs to put these two through some freshmen economics courses and quick!  Their lack of interest and knowledge is glaring and gives the appearance they really don’t care.  Economic news of this sort is becoming a daily event.    Their responses have been to send out their talking heads.  Let’s face it, their economic advisers doing their thing on CNN and Fox, is not the same as the candidates showing some grasp of the problems.  Frankly, I think they’re afraid of taking questions and looking ignorant.  Obama is only effective on the teleprompter and McCain when he talks off the cuff.  Any real dialogue would just emphasize their vacuity on the subject.