The stock market rallied yesterday after word of the Fed's rate cut spread, but don't expect to hear that type of news again any time soon. Most economists think yesterday's rate cut of 1/4 percentage point to 4.5% will be the last one until at least next Spring and by then some already are predicting that rates will go back up.
When the Fed announced the rate cut, it said that the economy was "roughly" balanced, with the risks of higher prices (inflation) and slower growth about equal -- in other words, in a neutral position. The Fed is not leaning toward a rate cut or rate increase for the next meeting in December. We may have a better idea of what the Fed is thinking when Fed Chairman Ben Bernanke testifies before Congress's Joint Economic Committee on Nov. 8.
But most economists believe we are on the high side of what Bernanke sees as an acceptable inflation rate -- between 1 and 2%. The Fed's preferred inflation measure rose to 1.8% in August and Commerce is expect to release a similar rate for September. Yesterday's GDP growth rate of 3.9% surprised many economists, but they don't expect it to last.
Kansas City Fed President Thomas Hoenig opposed the rate reduction at the FOMC meeting, which was the first dissenting vote since last December. He did not want to see any rate change. Only half of the Fed banks requested a rate change at this meeting. Before the September meeting seven of the 12 banks asked for the half point cut. So clearly the mood is shifting against lowering rates any further.
Lita Epstein has written more than 20 books including the "Complete Idiot's Guide to the Federal Reserve."
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Reader Comments (Page 1 of 1)
11-01-2007 @ 12:27PM
The Baron said...
What's amazing to me: The Fed cited its fear of higher crude prices causing inflation as the cause of its uncertainty about further interest rate cuts. Now, if they can prove that theory, they might win a Nobel prize for mathematics.But even Einstein's
examination of theories and laws governing the universe only proved probability
not certainty..But one thing is certain: High interest rates will never cause crude prices to decline when,in fact, the price of crude is no longer a true function of supply and demand which is now the prevailing circumstance. So what is the FED telling us?
The simple truth is that economists are the people who couldn't handle higher mathematics and science so they became economists. It's like giving the controls of a 747 at 600MPH and 30,000 ft.to somebody who hasn't even soloed. So the question is. why are we doing just that? Millions of people are about to start substituting food for heating oil and the country is being run by incompetents and the traders in the Future's market. All the result of the blind leading the blind.