The downside to aggressive Fed rate cutting is yet to come.

Over the past few weeks the Fed has used bullets in its arsenal to save the hemorrhaging Equity markets and slow the rate of descent of the US economy.  Lower rates are an asset to the Fed, but cutting rates to where much of the Yield curve is registering negative real interest rates can also result in negatives as well.  One of these will probably rear its ugly head very soon.

So far Fed rate cuts have put a bit of stability in the US Equity market and have put some life back into the real estate market for selected regions (e.g. New York City and surrounding area), but a major negative is continuing to plague US consumers in general and that negative is the presence of rising prices.  Lower rates have kept a lid on any sizable appreciation in the US currency which has led to rising prices from imports.  The generally weak state of the US$ over time has simply reduced the value of money, and the result is that consumers will need to spend more money to acquire the same basket of goods and services over time.  The rate of inflation has crept up from 2% to 4% over the past couple of years (and many would agree this level of inflation is grossly understated in the official numbers).  The fundamentals are in place to keep rising prices in play.

Yes, lower rates are a weapon in the Fed’s arsenal but given our current state of affairs…these weapons could backfire.