Federal Reserve Dealing with the Dollar - Essay Example

The article succinctly states that the economy “is limping rather than slumping”. The prevailing outlook over the next couple of months is bleak, and it seems the only way out of it is for the government to launch a stimulus plan to revive the floundering economy.

There have been widespread calls for the government to stop these cuts, as these bargain-basement policy rates are highly detrimental to the overall economy. Noted professors from Harvard University and big money management houses are imploring the central bank to stop these cuts, as these merely fuel inflation and help boost the prices of basic commodities.

However, not all is lost on the nation’s fiscal policy as there remains a lone bright spot. The weaker dollar has contributed greatly to stabilizing the economy and holding the fort while all havoc breaks lose. A much weaker dollar coupled with a growing global market has cushioned and reoriented the country’s economy by boosting corporate profits.  Excluding oil and other basic commodities, the country’s fiscal situation is not as bad as it looks on paper.

Even with that given, the fact remains that it is the skyrocketing prices of commodities such as oil that serve as the primary culprit in this economic rut. Usually, whenever the country is in an extended recession the prices will cooperate and go down accordingly. Surprisingly, the exact opposite happened and prices surged, catching analysts and Fed top honchos flatfooted. The fact that everything is out of order has been attributed to two key factors. First, the article argues that by continually slashing interest rates, the Fed encouraged speculation in commodities by making it cheaper to hold inventory. Second, by lowering the value of the dollar, all the Fed has done is merely push up the price of dollar-dominated commodities In turn, the dollar’s slide has caused a snowball effect on the price of oil, as these two are closely related and counterweights which have worked so well in the past have been negated by the ongoing credit crunch. To sum it all up, there is enough circumstantial evidence around to make a reasonable case that the Federal Reserve’s rate cuts have pushed up the prices of commodities and that it must now seriously rethink its strategy.

In my opinion, there is no one else to blame for the recent upsurge in prices other than the Federal Reserve. These drastic interest cuts seem to have no other motive other than being a panicky, knee-jerk reaction, They wanted to do something dramatic to appease the public and give off the impression that they were doing something good. But as recent events have shown, they had underestimated the effects of the credit crisis and came up with a hastily planned strategy, launching it without weighing the possible ramifications of excessive rate cuts. Perhaps they had forgotten that we are still the most powerful and influential economy in the world and that the worldwide markets still look up to us as a benchmark.  And now as we are saddled with insane oil prices and rising inflation, it's high time the Fed came clean and acknowledge their folly. They need to seriously come up with a better plan to bail out the economy. As we have seen first-hand, cutting interest rates is simply not the solution. At least, not anymore.