Filed under: Economic data, Federal Reserve
The Federal Reserve has lost its moorings. That’s because it used to stand for keeping inflation low. In September it cut rates 50 basis points because of vague fears of a recession — that’s negative GDP growth. Today, however, the Commerce Department reports that GDP grew 3.9% in the third quarter — the fastest in 1.5 years.
Yet the market is pricing in a 25 basis point rate cut to be announced this afternoon. As I noted earlier this week, inflation is rampant with oil hitting an all-time high and labor costs growing at a 4.9% annual rate. This inflation, coupled with the booming economy, would suggest that the Fed should raise, rather than cut, rates.
But I believe that the market is now dictating what the Fed should do and the Fed seems too intimidated by the reaction of the stock market to do its job of fighting inflation. So we can expect to listen to Treasury Secretary Hank Paulson talk about a strong dollar, even as it keeps hitting all-time lows.
A rate cut today will send that dollar even lower, making it hard for foreign investors to justify holding on to such a low-yielding currency.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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