Easing Inflation Gives Fed More Room to Cut Rates

US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs.

Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month.

The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground.

This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke’s testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing.

All of the major currency pairs have been consolidating since the middle of last week and the FOMC minutes could be the trigger for a major breakout.

Comments

[The_Value_I...:]

More room to cut? Do you want a liquidity trap? or hyper inflation from the need to excessively print money?

2008 Nov 19 11:30 AM

[Smarty_Pants:]

Byline (April 1, 2010) The Federal Reserve announced today that they will begin paying 10% interest to people who borrow money from the Discount Window. This increase of 2% over the current 8% payment to borrow is expected to further bolster the sinking economy.

In other news, the Federal Deficit passed $100 Trillion today and is expected to pass $200 Trillion some time next month.

2008 Nov 19 02:00 PM

[moonbat1775:]

"The Federal Reserve announced today that they will begin paying 10% interest to people who borrow money from the Discount Window." Smarty

The Fed is paying bankers to borrow money???

And it all started with a little cheating by a goldsmith long ago.

2008 Nov 19 02:05 PM

[Smarty_Pants:]

I saw an article today that the Japanese are hinting that there may come a day when US debt is issued in Yen, thereby placing the currency exchange burden on the USTreasury instead of on the borrower.

Hmmmm, seems gold bugs aren't the only ones who doubt the long term value of the dollar will hold up.

2008 Nov 19 03:17 PM

[Robert Nabloid:]

"Less price pressure will give the Federal Reserve more room to cut interest rates."

To what level? 0? Like Japan? Then we could have a carry trade where everyone shorts the USD...

2008 Nov 19 10:45 PM