The members of the FOMC raised their target on a too much high level (5.25%, above its neutrality which is around 4.25%) what always causes a slowdown of the GDP growth. However, the American economic recovery is remarkable since 2001, companies make large profits, which gives illusion of a durable growth on this paradigm.
The slowdown of the growth did not occur in the second quarter 2007 according to the figures published, because this growth is atypical thanks to globalization. Indeed, the endogenous growth is very weak in the United States because of the too high Fed funds. The GDP growth (as in the other developed countries) is reasonably good only thanks to exports, in particular by the equipment sales to the emergent countries which export consumer goods (bought in these developed countries which also profit them in return from this exogenous growth).
Companies of the developed countries make profit only by their activity abroad because their domestic markets are not very dynamic.
The Fed target above its neutrality always causes a slowdown of the endogenous growth and thus of stock markets… which are abnormally high because the growth is abnormally strong. A violent reaction of the markets was thus inescapable: I predicted a collapse… against the markets (all the economists recently thought that the Fed would maintain its rates in the near future!).
The guiding markets are the public bond-holder: the structure of the yields must become again normal with short rates, those of the Fed, around 4.25%, the 10-year fluctuating from 4.0 to 4.5% and the 2-year between these two pivots.
The sales turnovers and the profits will be revised downwards. The stock exchanges dropped and will drop. Alan Greenspan predicted that the markets will restore balances, and a recession at the end of 2007…
There is no major (nor systemic) crisis because the fundamental ones are good, in the United States, in Europe and Asia. It is enough that the members of the FOMC lower their target so that all becomes again gradually normal.
The injection of liquidity by the central banks is especially symbolic: the sums are low compared to the money supply. The central banks control the market demand in the very short term: billion put on the market a day are restored the following day or 3 days later! They ensure normal operations of the financial markets. It is their principal function.
The markets did not anticipate this collapse because they do not understand the complexity of the economic and financial current situation. They over-react, which maintains volatility. The members of the FOMC did not understand what occurs, or, they understood it well, and let make the markets, which will slow down the growth and thus core inflation, which is the required goal.
The crisis of the "sub-prime" is only the emerged part of iceberg. This collapse was to occur, in a way or another.
The rates just plunged to return in their normal band: the 10-year must fluctuate between 4.0 and 4.5%, the Fed having to be lower its target, and the 2-year between these two pivots,
The situation was normal since 2002 to 2005. The current collapse is only a return to the standards,