FOMC Meeting One for the Ages
To cut rates or not to cut, that is the question that Ben Bernanke and his fellow associates at the Federal Reserve must still be mulling over as the September 18, 2007 highly anticipated FOMC meeting looms ever closer.
There is ample evidence that a good dose of inflation, like an ill wind, is headed our way. For example take a look at this Commodity Research Bureau (CRB) Spot Index Chart that plots the index of 23 industrial commodities.
Then consider that we have wheat at record price levels. Gold is trading at over seven hundred Dollars an oz. There are record prices for crude oil at over $80 a barrel. Milk is at record levels as is the price of beef. I could go on but I’m sure that you get the inflationary picture.
If Ben Bernanke and company were to focus simply on the inflation outlook, the real inflation outlook, not the watered down official government one that excludes energy and food prices, they would not dare to cut interest rates at this time.
However, it is not as simple as that. The trouble originating out of the sub prime mortgage lending market and the resulting infection of troubles throughout the US housing market must be deeply troubling. With housing foreclosures already at record levels and with housing such an important part of the US economy some rate relief would seem to be in order.
The markets seem to have already priced in a 25 basis point reduction on the federal funds rate. Some analysts think that the discount rate will also be cut by 25 basis points. Others think a rate cut of 50 basis points is in order.
Any reduction in rates will likely put further downside pressure on an already weak Dollar. In fact with the Dollar already closing below 80 on the widely watched Dollar Index spot chart just a little additional move to the downside may set off a round of heavy selling as the Dollar breaks important support levels.
Much like the war in Iraq, there seem to be no good options. Whatever Ben Bernanke and the FOMC members decide there will be more trouble ahead. The decisions made at this FOMC meeting will be sliced and diced and discussed by analysts for years.
Truly this is a FOMC meeting for the ages.
