Thursday, April 24, 2008

News follows price.

Fed Fund Futures have already signaled the conclusion for the following article. As I have stated, one should look to the Euro area and the compression of interest rate spreads in the developed world, with deleterious effects for commodity countries and Emerging markets. It's high time for a crisis in one of those countries, and massive profligacy will be revealed when the bubble pops.

Fed Weighs Pause
After Next Rate Cut
Inflation Worries
Loom as Economy
Continues to Stall
April 24, 2008; Page A1

WASHINGTON -- The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week -- but then may be ready for a breather.

The Fed, meeting Tuesday and Wednesday, is likely to make what would be its seventh cut in eight months. The reason: Some officials see a case for more insurance against a deeper recession.

But others are concerned a cut could contribute to inflationary pressure with little benefit for growth. That means the option of standing pat will likely also be on the table. If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal-funds rate to 2.25% from 5.25% since last year.

Officials say the case for lowering rates further rests primarily on the value of additional insurance against a worse-than-anticipated economic scenario.

The shifting sentiment doesn't mean the Fed thinks the worst is past for the economy. It is almost certain to signal continued concern about economic growth and a willingness to cut rates further if the outlook worsens.

Still, officials would like to see whether their rate cuts, the Fed's other steps to lubricate credit markets and imminent tax rebates help produce a second-half recovery.

Moreover, while they think inflation is headed lower over the next year, they are sensitive to the risk that additional rate cuts could stoke inflationary psychology. Once embedded, such psychology can make a temporary rise in inflation permanent. A willingness to pause in rate cuts could help reassure investors the Fed takes the inflation risk seriously.

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