The visible hand in economics

March 08: Fed cuts rates to 2.25

Posted on: March 19, 2008

Another month, another 75 basis point rate cut by the Fed. This is (close to) what the market expected, so I can’t imagine that it would have much impact on anything. However, the statement was interesting.

Does anyone else find it interesting that the Fed cut rates by 75 basis points but still wrote a whole paragraph (1/3 of the meaty bit) on the risk of accelerating inflation compared to last time when they said:

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

The most interesting bit was:

Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

If the CPI measure ticks up, will this be the end of rate cuts?

4 Responses to "March 08: Fed cuts rates to 2.25"

Markets got their rally on regardless. Two dissenting votes this time, so certainly a hawkish camp emerging. I don’t know if you saw Matt but the last core inflation reading was 0% m-o-m, so maybe they’ll be worrying about deflation again before long.

“the last core inflation reading was 0% m-o-m, so maybe they’ll be worrying about deflation again before long”

I did see that indeed, but then I also read this article from the big picture:

http://bigpicture.typepad.com/comments/2008/03/cpi-2008-vs-198.html

Two things that came out of it were:

1) Petrol prices were a negative contributor to the CPI rate and they have risen significantly since.

2) We shouldn’t based our forecasts on a single datapoint in a volatile series.

That is why I said “If the CPI measure ticks up, will this be the end of rate cuts?” – I’ll definitely be interested in seeing the March CPI figure.

“maybe they’ll be worrying about deflation again before long”

Who knows, the US might end up in a liquidity trap . Then we would have two modern case studies to show first year economics students 😉

I do like to read Barry Rhitholz on finance but i disagree with him completely on that whole “the government is lying to us about inflation thing”.

Let me introduce myself, my name is Kunta Kinte and 0 % reserve is my nomination for the Nobel Prize. Is it the key of my salvation or it is the reason for my starvation, you decide. God bless Plunge Protection Team.

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