Greenspan, Bernanke, and this week's Fed meeting
September 16, 2007
Former Fed chairman, Alan Greenspan, currently on a speaking tour to promote his new book said that over the long run, the biggest problem facing the U.S. economy is "the re-emergence of inflation," and rising interest rates. The emergence of Greenspan two days before the meeting of the FOMC gives more credence to the growing number of economists who are questioning the wisdom of cutting interest rates to give the American consumer some band-aid relief. Greenspan's warnings regarding inflation come at a time when gold is over $700 an ounce and oil over $80 a barrel -two indicators of price inflation. Furthermore, 2nd quarter GDP measured a neutral 2.5% and inflation has been measured on the higher-end of the Fed's target zone which would give support to the camp who believe the Fed should remain inflation-vigilant and not lower rates.
The future market is not a perfect forecasting model for the direction of fed funds rate, but it cannot be ignored that cumulative rate cuts of over 1.25% in the next 9 months is implied in the trading of fed funds futures. Rate cuts would certainly benefit strapped debt-laden consumers, but would weaken an already weak U.S. Dollar. Bernanke and company have sent mixed signals over the last few weeks about their resolve to lower rates, but this is the week of clarification and the below chart may bend in a new direction.
Our prediction remains a quarter point rate cut this week with no change in bias which would provide relief to the American consumer, but not enough to change the momentum of their mortgage and credit troubles.
