Here's a bit of juicy news. According to the Wall Street Journal (subscription required), The Federal Trade Commission (FTC) plans to crack down on market manipulators. They have decided to levy fines up to $1 million dollars per violation a day. The rule covers both physicals and futures.

The crackdown involves mainly the oil traders. Specifically, the language reads as follows: It bans oil market players from issuing "false public announcements of planned pricing or output decisions, false statistical or data reporting, and wash sales intended to disguise the actual liquidity of a market or the price of a particular product." The rules would also prohibit "material omissions from a statement that, although true, is misleading under the circumstances."

Add another case study to the controversy over speculators and market manipulation.

The Commodity Futures Trading Commission is investigating whether cotton prices were 'artificially inflated' in early March, The Wall Street Journal reported Wednesday (subscription required). The March 4 price spiked from about 70 cents per pound to an intra-day high of $1.09 and closed at 93.1 cents.

In Wednesday morning trading, cotton rose about four-tenths of one cent to 70.070 cents per pound.

The Journal reported that the price spike in early March was unusual and baffled traders because cotton inventories were at their highest level in four decades, towel and fabric demand was weakened by the housing slump, and global supplies were high.

On the other side of argument, one which argues that market forces set the price, some cotton merchants themselves were trading aggressively; a little-used exchange rule suddenly required merchants to unwind sell orders; and financial investors, including pension and hedge funds, started to enter the market, which generated an eight-fold jump February 19-26 in net buying, The Journal reported, citing CFTC data.

Hedge funds and speculators reduced positions in oil by 80% as prices rose to records and as U.S. regulators started investigating trading, Bloomberg News reported Monday, citing government data.

Net long positions decline to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27, 2008 from a record 127,491 contracts on July 31, 2008 according to a U.S. Commodity Futures Trading Commission report.

Last week, the CFTC, under pressure from Congress, announced that it had expanded an investigation of oil's price rise and oil futures contracts. Oil has increased about 100% in the past 12 months, and about 480% since 2002. Oil rose $1.50 to $128.50 per barrel in mid-day Monday trading.

U.S. regulators Friday disclosed a broad nationwide investigation into potential oil-market manipulation and said they are expanding surveillance of energy markets, The Wall Street Journal reported Friday.

The Commodity Futures Trading Commission announcement of an ongoing and widening inquiry occurs amid a 4-year rise in crude oil prices in which gasoline, diesel, and heating oil prices hit record highs, Reuters reported Friday.

Oil closed Friday up 73 cents to $127.35 per barrel. Oil has risen about 100% in the past 12 months.

Many Congressional officials and consumer groups have been arguing for a systematic investigation into futures prices, asserting that institutional investors and other speculators have manipulated oil prices and driven them "artificially higher."

Others, including economists and oil executives, argue that the price increases have more to do with the sector's bullish fundamentals, including inadequate crude oil production growth amid rising demand.

Oil Analysis: Strong evidence suggests that the bulk of oil's 4-year bullish run is rooted in fundamentals, with the reduction in the global safety cushion -- the spare oil between daily global oil supply and demand -- accounting for today's near-record oil prices. Still, that's not to say a rigorous inquiry would not yield compelling data or new insights. One area of interest that the inquiry will explore: whether oil storage operators have issued misleading information about oil in their tanks to profit from oil trades, Reuters reported Friday.

The market was looking like it would open up this morning. That is, until 8:30 a.m. when the wholesale inflation report came in at more than twice the rate economists had expected. Now the market is expected to drop. Will the Plunge Protection Team (PPT) step in as it may have done yesterday?

The reason the market reversed is that with higher than expected inflation, the Fed is less likely to cut interest rates. The Fed wants to keep core inflation between 1% and 2%, but when the PPI rises 1.3% in a month -- instead of the expected 0.6% -- investors fear that the Fed will need to raise rates to keep inflation within its target range. Is the Fed serious though? Last week, a productivity report noted that unit labor costs rose 6.6% in the last quarter of 2006. Although bonuses figured into the statistic, the slower growth in productivity suggests that wage inflation could be a future concern.

My guess is, though, that the Fed has a more complex goal -- it's torn between the desire to control inflation and the need to avoid sinking the economy too much. As this report from Fortune suggests, people with adjustable rate mortgages can get into trouble quickly when those rates rise. With two-thirds of economic growth coming from consumer spending, a rise in interest rates could then reduce the heavily leveraged consumer's ability to keep spending.