Tuesday, November 20, 2007

Now the dollar does matter...

One could add a nice politically minded narrative that includes Ron Paul's recent lambasting of Bernanke, but the truth is the dollar matters to the Fed, and it is now disclosing more of its hand. By deeming the rate cut a "close call", it has finally begun to take steps in ameliorating inflation expectations, which has ticked up considerably since its actions starting September 18. It is still in between the Scylla of inflation and Charybdis of housing-led recession...and it knows that the financial economy (an admittedly loosely defined term) has always followed the real economy and the engine of housing.

By Brian Blackstone
WASHINGTON (Dow Jones)--Though last month's decision by the U.S. Federal
Reserve to lower official interest rates was a "close call," officials were
worried enough about the chances of a severe housing-induced downturn to act,
according to the minutes of that meeting released Tuesday.
The minutes dwelled extensively on the economy's vulnerabilities, suggesting
that while officials adopted a neutral view of economic and inflation risks
last month, they probably see the potential downside from weak growth as the
bigger worry.
Reflecting the jittery balancing act officials face, they also seemed more
worried about the dollar than in previous meetings, calling its recent
"significant" decline an inflation risk.
"Many members noted that this policy decision was a close call," the Fed said
in the minutes of the Oct. 30-31 Federal Open Market Committee meeting. Minutes
are usually released with a three-week lag, but October's were moved up one day
so as not to conflict with the early market close Wednesday ahead of

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