The minutes of the recent meeting of the Federal Open Market Committee (FOMC) were released today. It indicated that the decision to cut the Federal Funds Rate and the Discount Rate at the last meeting on April 30 was a "close call." This may indicate a desire by the Fed to pause any future decreases in these interest rate targets. However, the minutes still seem to leave open the possibility of future interest rate cuts if necessary.
The FOMC minutes seem to indicate bad news across the board. On the economic front, the Fed lowered its growth forecast and increased its forecast for unemployment. However, the unemployment rate still is not forecast to increase to levels associated with prior severe recessions.
The Fed also predicts inflationary pressures will continue for the near future. This will also put increasing pressure on "core inflation" which excludes food and oil and which is the Fed's preferred measure. However, the Fed does forecast that core inflation will eventually moderate.
What does this mean for the investor? This means that the Fed is trying to walk a very fine line. It is trying to balance the delicate economic situation with need to maintain credibility on inflationary pressures.
If the Fed adopts a position that is too hawkish on interest rates, it could trigger a market downturn in which it will be forced to react by lowering interest rates. This would decrease its credibility. This is the primary reason that the Fed is making it very clear that it will cut rates if necessary and is trying to be very explicit that it is not promising a pause in rate cuts.
However, it is still trying to maintain some credibility on inflation. This is the primary emphasis on the latest rate cut being a "close call."
With oil prices still rising and the credit crisis continuing, the current conflict between economic duress and inflationary pressures shows no signs of being resolved in the immediate future. However, I believe that the Fed will continue to tolerate a much higher level of inflation than it has in the past because of the current economic environment.
Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com, and is the author of Follow the Fed® to Investment Success: The Effortless Strategy for Beating Wall Street. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Reader Comments (Page 1 of 1)
5-21-2008 @ 7:33PM
william lindblad said...
Months ago I stated that the Fed position will eventually be as the old adage of "between a rock and a hard place". They are now there. The pressure on the economy builds daily and I stand with my original prediction that it will culminate in a total collapse between the end of July and the first weeks of August. The BBC's Robert Preston got it right with the Super Rich, The Greed Game. Good article and should be everyone's bed time viewing. If you wonder what started this rolling this provides the answer. While I stay up on the economy I have yet to see anything that revealed the bonus payments to the bankers that made the sub prime mess happen. It was all about money. It was all about excessive greed. Now all of the U.S. will pay dearly, while those that made it happen live in the lap of luxury. This is a very sad case and says little for our system. Since the Fed is really private sector banking there is little doubt why they were reluctant to intervene and what we have for elected representation fairing not much better. Oh well, grow corn as you can sell it to make ethanol and the cobs burn in a fire. Welcome to a repeat of the 1930's.
5-22-2008 @ 6:38AM
al coholic said...
From your post...
The Fed also predicts inflationary pressures will continue for the near future. This will also put increasing pressure on "core inflation" which excludes food and oil and which is the Fed's preferred measure. However, the Fed does forecast that core inflation will eventually moderate.
Gee, I wonder why "core inflation" is their preferred measure? The long term forecast for the cost of all "core" items is higher. Why should anyone be surprised that the cost of goods gets progressively higher as the world's population doubles every decade or so and areas of the world where consumer demand was virtually non existant now compete with us for goods? technology and productivity can only partially and temporarily ease this stuation.
Even things we now take for granted, like cheap, clean water will soon begin to cost a lot more. Unfortunately these times that we consider to be so lean may later be looked back upon as th "good old days."