Thursday, April 24, 2008

Another Quarter-Point Cut Coming Up

The fed seems to be getting ready for another quarter point rate cut. And the reason?

Some officials see a case for more insurance against a deeper recession

What about inflation? With food and energy prices running wild, the fed seems to provide only lip service to inflation. As everyone has said, the rate cuts won't help anyone (except may be the banks, I guess). The mortgage rates have risen in one week to 6.04%. If the inflation gets worse, the mortgage rates will rise further. That is going to make things worse than better.

Fed Chairman Ben Bernanke and his colleagues are unlikely to take rate cuts off the table entirely. The Fed did that in October by saying weak growth and inflation were of equal concern. Within weeks, deteriorating market conditions forced the Fed to signal a resumption of rate cuts.


Oil prices earlier this week reached a new high in futures markets of just under $120 a barrel. Mr. Meyer says the latest $10 increase in the price of oil per barrel would reduce economic growth by as much as half a percentage point. Its rise has hurt consumers as well as energy-sensitive industries such as airlines, which have seen their share prices slump and some small players file for bankruptcy protection.

Even while downside risks to the economy persist, officials remain unsettled about inflation. While they expect rising unemployment to put a cap on wages and prevent a wage-price spiral, they worry that inflation fears may be feeding a fall in the dollar and the rise in commodity prices, and that further rate cuts could aggravate that inflationary psychology.

Talk is cheap. They keep talking about inflation without doing anything about it.

More fundamentally, officials want to give the actions they have already taken time to boost growth. Fed governor Kevin Warsh said last week that as credit markets begin to operate more smoothly, more of the Fed's interest-rate cuts will filter through to the economy. "The problems afflicting our financial markets are indeed long-in-the-making," he said. "Time is an...essential tool of our policy response."

It looks like the only reason for a quarter point cut is to appease the market. You don't want to do anything "unexpected".

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