The Fed: Will They Or Won’t They?

by Alex Stenback on April 28, 2008

Greg Ip at the Wall Street Journal outlines the case for and against a "pause" in Fed Cuts after this week.

Argument for further Cuts:

"There’s probably a recession going on, and the Fed may want additional insurance that the recession does not become an escpecially severe one."

Argument against further cuts:

"Additional interest rate cuts could be a little bit worrisome…it could for example lead to further weakness in the dollar, it could lead to futher upward pressure on commodity prices."

In other words, it all will boil down to what the Fed believes is a larger threat to the economy – inflation, or a recession?  So far, the Federal Open Market Committee has come down fimly in the recession-is-the-biggest-threat-so-inflation-be-damned camp.

Greg also goes on to make what we think is the central point to this discussion: If we are in a recession, inflation should take care of itself, as it is awfully hard for inflation to persist in the face of slumping demand and zero or negative job growth.  "Awfully hard" is not the same is impossible however, and much of the global rise in prices is a result of offshore demand, so the Fed is indeed in a precarious spot here.

This week’s cut is a forgone conclusion, but the big news will be if the statement released at the conclusion of the Fed meeting signals an end to cuts.  This would almost certainly send mortgage bonds upward, and rates could improve.
Fed Weighs Pause After Next Cut [WSJ]

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