Bernanke & Co Cut 25 Basis Point

The DOW and the S&P reacted enthusiastically to today's rate cut and statement by Bernake & Co.

The reason? The statement put inflation back on the table and even mentioned energy as an inflationary force. Inflation, not growth was the predominant focus of the statement. Now one has to wonder if at the Dec. 11th meeting there is even a chance of another cut. It is a definite "hawkish" view. The good news? If inflation is under control and the risk to growth vs. inflation is equal, then you have to assume there is very little risk to growth.

The statement is as follows:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting."

The fact is was not even unanimous is ominous for those wanting another cut. One has to think now that with the economy growing at almost 4%, it would take a significant event to get another rate reduction. Going even further, growth seems to be increasing, not decreasing so the need for additional cuts is further diminished. It now seems that the previous cut was simply to provide assistance with the credit issue at the time and now that it seems to have passed, the Fed will sit on the sidelines.

Another thing, why are we even talking about recession possibilities when GDP is growing at 4%?

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