What we’re seeing in the US financial markets and economy is the culmination of the “Perfect Storm”

The Federal Reserve is in a bind.  Low US interest rates have come to adversely affect the value of the US$, which in turn has helped drive higher inflation and higher prices for Crude Oil.  As we all know, the low levels of interest rates were in reaction to the breaking of the real estate bubble and fallout from sub-prime issues and poor risk management in lending activities.  The falling US$, rising prices of Crude, rising inflation, falling housing prices and now increases in unemployment have provided the platform for THE PERFECT STORM….or simply put, a massive conundrum for policy makers.

The Fed has recently alluded to the fact to halting further cuts in interest rates and wishes to focus on supporting the US$.  In fact some say that one of the only remedies to the current perfect storm we are experiencing is to raise rates.  The problem with that tactic is that Equity markets will most likely experience significant drops and the fragile housing market will simply be rocked.  The fallout from further problems in real estate would most likely filter over into more foreclosures, more bankruptcies, further problems for financial institutions and higher unemployment. 

The Doc is not going the offer a remedy at this juncture, but will mention that one of the problems that led to the perfect storm was excessively cutting interest rates (which was not supported by the Doc).  Perhaps if rates were left at more normal levels, the short term would have been painful, but the longer term may have looked much better than what is transpiring now.