Lost in the din following the Federal Reserve’s quarter point rate cut on Dec. 11 is a change in the Fed’s outlook from the Oct. 31 meeting when they also cut rates by a quarter percent. In October the Fed included the following statement, “The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.”
This caused a negative reaction by the market that read it as a warning that the Fed would keep the funds rate at 4.5%. It didn’t take long for the market to rebound and count on the Fed to come through with another cut in December. Given what happened this week, it is hard to imagine that less than six weeks earlier the Fed indicated it may keep rate steady. Bernanke signaled the December cut before the meeting and some analysts expected or at least were lobbying for a larger cut.
Not only did the Fed go ahead and cut rates again but it softened its wording on inflation, leading many people to expect further cuts at the next two meetings. But in addition to the Fed meeting this week, the Bureau of Labor put out its inflations reports and it certainly doesn’t support the Fed’s gameplan.
The Consumer Price Index for November increase by 0.8% and the Producer Price Index increased by 3.2%. Apparently skyrocketing energy costs and years of easy monetary policy eventually will push inflation higher, and with those number it will be awfully difficult for the Fed to continue easing rates, no matter how many protest sell-offs Wall Street wages.
