If you hope to make money off the flailing economy, you need to keep your eye on the Fed. Last month, the Fed made another quarter of a point rate cut, bringing the target Fed Funds rate down to 2.25 percent. This makes 3.25 percent the Fed has shaved off the rate since last summer.
These rate cuts make it cheaper for banks to borrow and, as a result, make it cheaper for you, the consumer, to borrow. But before you get too excited, remember that rate cuts have side effects. For instance, making it cheaper to borrow can increase inflation. And this means goods and services (especially imports) will cost you more money.
At this point, Ben Bernanke has to feel like Barney Fife on the Andy Griffith Show. Remember how Andy gave Barney only one bullet at a time… and he had to keep it in his pocket? Mr. Bernanke has to feel like he is running out of bullets.
The economy isn’t improving the way the Fed had hoped. With the cuts being done in quarter-percent increments, the most the Fed has left is nine cuts. Of course, they could go the same route as the Bank of Japan and start doing 0.10 percent cuts.
Last month’s cut is another spent round from the Fed’s gun. How long will it be before they start raising rates again?
Given the way food and energy prices are climbing, it won’t be long before the Fed has to make inflation their main concern. At that point, they will have to make moves to strengthen the dollar. This would help counteract the tremendous rise in oil prices. When the Fed decides to stop cutting rates, the dollar should strengthen and items that have ramped up on the fall of the dollar (oil, in particular) will start falling.
There will be several ways to make money when the Fed starts raising rates. You could, for example, buy shares in the inverse ETF for oil, the UltraShort Oil and Gas ProShares (DUG). The value of this ETF will increase as the price of oil falls.[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he gives easy-to-follow, step-by-step advice that you can use to create consistent, automated income. Learn more about how he can help you produce explosive gains – no matter which way the market is trading – by clicking here.]