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Fed rate cut could send interest rates higher!

Fed rate cut could send interest rates higher!

Foreign creditors could be preparing to slam Greenspan’s next rate cut right
back in his face. The U.S. dollar has recently fallen to a four month low against
the Euro and Swiss Franc, and came close making a 2.5 year low against the
Australian and New Zealand dollar. In fact, the chart pattern for the euro
projects a short-term move, perhaps over the next 3 -6 months, of up to 1.15
to 1.20. We have also seen recent weakness in longer-term treasuries and home
building stocks, suggesting that long-term interest rates could be headed higher.

I believe that there is a good chance that a rate cut by the Fed on Wednesday
could lead to a substantial sell off in U.S. dollar denominated debt, causing
U.S. interest rates to rise, not fall. This would be a disaster for the Fed
as it would signal that it is America’s foreign creditors, not the Fed, that
control the direction of U.S. interest rates. Once the market correctly perceives
this reality, look out. The dollar will fall fast, sending U.S. interest rates
and consumer prices soaring. That will kill consumer spending and bust the
housing bubble, sending the U.S. economy into a deep recession. A weaker economy
will further undermine foreign demand for dollars, sending interest rates even
higher, further weakening the economy, creating a self-perpetuating cycle of
rising interest rates and economic weakness.

Therefore, this next rate cut may well be Greenspan’s last, as falling demand
for dollar denominated debt, together with increasing supply from growing government
and consumer borrowing, cause Greenspan to raise interest rates perhaps as
early as the very next FOMC meeting.

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