On the same day that third quarter Gross Domestic Product (GDP) was revised higher to 4.9%, its highest quarterly growth since 2003, Federal Reserve Board Chairman Ben Bernanke gave a speech that was interpreted by most news outlets as supportive of another rate cut at the Dec. 11 Federal Open markets Committee (FOMC) meeting. A growing belief that the Fed would cut rates again in December spurred a two-day 500 plus point rally in the Dow Jones Industrial Average this week and the Fed fund futures at the Chicago Board of Trade rallied (indicating a greater likelihood of a December rate cut) following Bernanke’s comments.
That came just two days after Charles Evans, President and Chief Executive Officer of the Federal Reserve Bank of Chicago, told a luncheon crowd at the Futures Industry Association’s Futures and Options Expo in Chicago that the risk to the economy of lower growth and inflation was still equal as reported in the minutes of the last Fed meeting on Oct. 31. What if anything occurred in the last two days to change that outlook is unknown. But there is a growing appearance that the Fed is reacting to weakness in equities markets and appears ready to support the stock market with lower rates when the bears grab momentum. While the Fed may just be reacting to an anticipated fourth quarter slow down, it is odd to hear talk of a further rate cut on the same day the government reports 4.9% GDP growth. There was a time—not that long ago—that growth beyond 3% brought expectations of a tightening.
