I believe you are correct that the Fed is stuck between a rock and a hard place. They left rates alone today, that was because the economy is slowing and housing is falling. But, they are supposed to be fighting inflation and inflation is very much a problem now. My guess is that the Fed will be weak, and will ignore inflation, they will talk a mean game but won’t do anything about it, to keep the economy afloat. The problem is the US econnomy is based on debt and if rates get to high, it would be a disaster. Its called a liquidity trap, rates have been too low for too long and people have taken on too much debt. The same thing has happened in the UK. Their central bank raised their rate by .25% and people are crying because they can’t pay their debts. The next problem is that the Fed already cut the funds rate to 1% in 2003 or so. If they cut rates again, it will not have the same impact, because people are already so indebted, that is why you are seeing 40 year adn 50 year mortgages coming out. People can’t continue servicing their debt. I believe in Japan, at the height of their RE bubble they came out with 100 year mortgages. Well their RE market has been down more than 50% for 10 + years. And their central bank cut rates to 0% plus they went even further by printing money to buy 10 year bonds to drive down long term rates. But, everyone was so indebted that the increase in liquidity by their central bank did not stop the housing market from crashing. Also, their stock market is still down 70% from 1989. It peaked at 40k in 1989 or so and is at 16k or so now. Their psychology changed and people refused to buy even with 0% interest rates. When prices are falling, especially if they are falling fast, do you buy today, or wait a day to buy for a cheaper price. This becomes a vicious circle, the exact opposite of the foolishness we saw the past couple of years where people felt that if they didn’t but today the price would be higher tomorrow.
