Tuesday, September 18, 2007

About Fed Rate Cut

While a rational analysis would have argued against any cut, and while a 25 basis point cut seemed slightly more likely, a 50 basis point cut wasn't exactly shocking to me. I considered it to be almost as likely as a 25 basis point cut. Just as with the ECB announcement nearly two weeks ago the central bank again disappointed on the downside.

The results on financial markets were all too predictable with both stock and commodity prices surging and the dollar falling. The dollar now seem fall below the key 1.40 dollars per euro level to the euro really soon while oil and gold and other commodities will continue to rise in value. While official commodity trading had ended before the Fed announcement, electronic trading shows gold breaking through the $730 per ounce level and oil breaking through the $82 per barrel level.

Tomorrow's CPI report for August will probably show flat or falling numbers compared to July, but ultimately the surge in commodity prices that we've already seen and that will be further encouraged by today's move will set into motion sharply rising consumer price inflation later this year and in 2008. For that reason, the Fed will regret today's appeasement of the Jim Cramer's of the world.


Blogger Flavian said...

According to the rule Frederic Mishkin advocated when he advised the Swedish Riksbank, the lending rate ought to have been raised.

But, in reality, he will of course always advocate that rule which gives him maximum excuses for inflating.

3:10 PM  

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