The timing and circumstances surrounding the upcoming interest-rate decision on Tuesday, September 18th is really interesting.
Nearly everyone on wall-street expects the feds will lower interest rates on their session next week. It's actually becoming not even a question of "if", but "how much". Conservative estimates are that they will only lower then 0.25 points, while some are even talking about 0.75 all at once. I watched an interview today with a guy at Morgan Stanley who said the market has ALREADY priced in a half-point interest-rate drop. (In other words, the stock market should theoretically be 400 to 500 points lower right now, if not for the fact that most people believe the feds will bail them out).
Today was a key day, as we saw presidents of several key banks make statements about interest rates and the economy Investors were hoping for some hint about what the feds might do... What they got was a statement from at least 2 different bank-heads (who sit on the federal reserve board) who reiterated that it wasn't the job of the federal reserve to bail out institutions who had made bad investments... and yet there's still hope from the street that the fed "can't be serious"... many saying if they don't lower interest rates, we'll head almost immediately into a deep recession. Nobody wants to believe the fed is so stupid they won't lower rates, even though the comments they're making are clearly hinting that they don't want to.
The big reason the fed doesn't want to lower interest rates is simple: the dollar is really in bad shape right now -- it's been in a steady free-fall for the last 3-months... It's been many, many decades since the dollar has seen levels this low. The international markets have caught on that the fed is printing their way out of the national-debt and social-security problems (among other things). They were also not amused with the decision to lower the rate on the discount-window in response to the mortgage crisis (this also de-values the dollar). All of these things have a HUGE impact on how much confidence the world-markets have in the U.S. dollar... Combine these problems with the fact that SOMEONE appears to be engaging in a slow-but-steady sell-off of U.S. dollars (many speculate it's China, and for good reason), and we can see confidence levels in the dollar plummeting world-wide. IF the fed lowers interest rates, you can expect accelerated dollar sell-off's and possibly a tightening of the credit that's extended to the U.S. by the rest of the world (can you imagine what would happen if confidence in the dollar dropped so low that the U.S. government could no longer borrow money?!)
So.... the situation is simple. They have two choices.
Choice A) If the fed lowers interest rates, the stock markets will rally and everyone here in the states will be very happy as they see the feds making money cheap.... This will cause inflation to jump by 2 to 5 percent almost overnight (depending on how much they choose to lower rates) as many take advantage of the cheap money -- and confidence in the U.S. dollar will plummet simultaneously. The world-markets will accelerate their current sell-off of the U.S. dollar -- putting the future confidence of the dollar at serious risk, and causing a long-term, accelerated inflation slide that the feds may no longer be able to control.
Choice B) If the fed chooses to leave interest rates as-is, the market will probably plummet by 400 to 800 points in one day (with a long-term broad sell-off lasting a few months.. but the international markets will be happy as they see the fed standing behind their currency and not intentionally de-valuing it. The dollar will rally. The confidence in the U.S. dollar will remain strong, and American corporations will really take a hit. A long-term recession will set in with a bursting liquidity and real-estate bubble in the U.S.
It's the day of reckoning for the fed. Congress has put us in this situation with their drunken spending, and now the federal reserve will have to choose their poison.