The Federal Reserve’s Rate Cut and Consumer Confidence

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As markets expected, the Federal Reserve lowered the Fed Funds rate 50 basis points to 1%. The government refuses to admit the economy is in a recession, yet the statement released by the FOMC reads as if the nation is in a depression.

Like his predecessor Alan Greenspan, Fed Chairman Bernanke is eager to do the market’s bidding. The market is looking for further rate cuts and no doubt was reassured that the sentence “The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability” was retained in the FOMC’s statement.

Perhaps the market should read the statement’s second paragraph more carefully. “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expectations.” “Markedly” probably reflects the Committee’s concern over Tuesday’s October Consumer Confidence Index at 38.0, the lowest level since the index began in 1967. The Conference Board’s index surveys 5,000 households to gauge their level of optimism regarding current conditions as well as expectations for the next six months. The results are compared against a benchmark score of 100 established in 1985. The survey’s data was compiled up to October 21 and was 23.4 points lower than September. The level of pessimism concerning overall economic conditions over the next six months (comprising 60% of the index), was much higher than September’s.

To be jovial emanates from Jupiter, the planetary energy of optimism. With Jupiter in Capricorn, a sign ruled by Saturn the planetary energy of contraction and pessimism, it’s difficult to get consumers to spend unless they perceive they’re getting a quality product or service at a bargain price. This energy is further supported by Saturn in Virgo, another earth sign that increases the cost of essential goods and services, crimping consumer budgets. When the Consumer Confidence Index began in 1967, Saturn was in Virgo’s opposite sign Pisces making a series of oppositions to Uranus in Virgo. From now until mid -2010, the energies are reversed, as Saturn in Virgo will make a series of oppositions to Uranus in Pisces. Saturn/Uranus interactions historically have manifested contracting and unstable economic conditions. The automatic reflex of lowering interest rates to stimulate economic growth is not the solution. Just as the world witnessed during the mid-1960s, this alignment represents the status quo vs. the winds of change desiring to reform societal structures such as government and the financial system.

Consumer spending comprises over 70% of the U.S. economy, yet even the retail sector has gained since Tuesday’s bear market rally. The Fed “expects inflation to moderate in coming quarters to levels consistent with price stability” because energy prices have recently declined. The Fed and the market fail to recognize all the inflation still out there in the form of high food prices and other essential goods and services that has not decreased. Lowering the Fed funds rate only serves to increase consumers’ pain. Saturn in Virgo represents the working class/consumers whose incomes have been squeezed from high costs, low/stagnant wages and high debt.

The Fed and the market proclaim rates must be lowered to combat deflation. When home prices were increasing yet not counted as part of inflation, Greenspan was preoccupied searching for signs of deflation. Bernanke thinks deflation has returned because home prices have on average declined back to their 2003-4 levels. Economists look for consumer spending on big ticket items such as motor vehicles, appliances, and furniture as signs of economic recovery. The spending bubble fueled by the last time Fed funds was 1% was so exaggerated that consumer spending was stolen from the future.

Fed rate cuts supposedly take six to nine months to work their way through the economy which means the Fed has to have a good gauge of the future. Yet Greenspan and Bernanke have stated they lack the ability to accurately forecast the future. What the Fed and the stock market refuse to admit is that most consumers are adjusting their lives to the future while the Fed and the stock market are trying to recreate the past. Six months from now, Jupiter will be in Aquarius where it will conjoin Neptune. Neptune rules inflation and Jupiter expands. Jupiter and Neptune will be conjoined for most of 2009, and more importantly, will conjoin the USA’s natal Moon in Aquarius. The Moon rules food and shelter, so it is crucial that controlling inflation is a top monetary policy priority. Economic growth cannot take place without price stability.

Whether they like it or not, consumers realize the days of living beyond their means are over and they realize it has damaged every aspect of their lives. They’ve seen firsthand that the “free market” as it has been practiced in the last several years is by no means free. Pluto (debt) has been in Jupiter-ruled Sagittarius since 1995. Lending was cheap and easy, allowing the world to feast on all kinds of material goodies. If they have enough money to hold onto their home and all the stuff they bought, it’s fairly new and doesn’t need to be replaced. This has been a learning experience for the world (Sagittarius rules higher education!), but it seems the only people grasping the lesson are the consumers of the world. As we transition from one cycle (Pluto in Sagittarius) to another (Pluto in Capricorn), consumers and businesses are de-levering their balance sheets. The combination of Jupiter in Capricorn, Saturn in Virgo, and Pluto in Capricorn is a cycle of contraction and rebuilding balance sheets (saving money). However, a 1% Fed funds rate is working against controlling inflation and the ability to save money.

The end of October each year is the time when mutual fund managers engage in “window dressing,” selling losing positions in their fund and buying stocks that are hot in an effort to boost their image to investors. It is my belief that Bernanke and Treasury Secretary Paulson are engaging in their own form of window dressing, using their dire rhetoric and wasting taxpayers’ money to save the present while sacrificing the future. The Wall Street Journal referred to the October 28 Scorpio New Moon rally that saw the Dow make its second largest point gain in history (+889.35) a “Moon Shot.” Is the U.S. ready to make a ten year commitment to technical innovation in infrastructure in the way we did in the 1960s to go to the Moon?

Related Post: “Warren Buffett Says Do Not Fear, The Time To Buy Is Here”

1 comment:

Dixie said...

This is an interesting piece, and I think you're right on that the consumers get it even if the fed doesn't. It also seems the consumers are hoping the fed knows something they don't, as opposed to the other way around. Yeah, right. The government has only recently started to admit there were serious issues with the economy.

I suspect the interest rate cut won't fuel a significant spending bubble as it may have in the past. People are frightened.

Hoping maybe Pluto in Capricorn will obliterate the nonfunctional elements of the system and leave us with responsible, realistic, and optimistic growth ultimately.

Thanks for the thought-provoking piece. :)