TAMPA, Fla. -
* Rarely has the rationale for lower interest rates been so convincing. As this goes to press, in a surprise intermeeting move the Fed cut the funds rate target 75 basis points to 3.5%.
* Home prices are falling; a credit crisis of biblical proportions has struck global financial markets; and nearly every reliable forward indicator of the economy says recession.
* I believe the fed funds rate may fall as low as its 2003 level of 1%. As investors seek safe haven, Treasury bond yields will be pressed toward their cycle lows.
* Monetary and fiscal stimulus and traditional stabilizers will cushion the downdraft and enable recovery. But as of yet there is no new locomotive visible to help out on the other side.
* Conventional wisdom has it that Asian economies will decouple from the U.S. But net U.S. demand for the rest-of-the-world’s exports–our $700 billion annual trade deficit–will shrink and drag global growth with it.
* As happens every recession, slackening labor markets and utilization rates will turn inflation down. The disinflationary effects of falling demand will outweigh the inflationary implications of the falling value of the dollar. And as global economies slow, the demand for crude oil will gravitate lower as will oil prices.
* The message for credit unions, then, is to make bolstering capital ratios the top priority, reach out early to help members who may be financially strapped, and become avid students of the new forces outlined here to better chart the course in these challenging times.
