In my opinion the Fed is now set up to cut Interest Rates (this is a changed opinion). The reason is that the consumer is now starting to restrain their spending patterns. We saw this with Wal-Mart (NYSE:WMT) earlier in the week.
However, the Fed is not ready to act yet. Favorably, the Fed would prefer to remove the inflation bias from their statement before they cut rates. However, they may not have the luxury of doing that.
If the Fed gets one more piece of evidence that supports the Wal-Mart Phenomena, the Fed will host an emergency meeting and cut rates.
This could come from a major retailer (warning), or it could come in the form of the preliminary consumer sentiment data being released tomorrow. This data will include some bias pre-credit crunch though, so it may be somewhat skewed. However, we should get a feel for what the consumer is thinking with this data, and, assuming that the data is up-to-date, I am expecting the consumer to show concern.
I did not see evidence of this prior to the Wal-Mart phenomena, but I now expect the consumer to restrain his spending patterns and that will cut into economic growth considerably. This is what will permit the Fed to cut rates without allowing pricing power to come back into the Market.
A rate cut is now needed for the consumer to maintain his current level of spending.
An emergency meeting could be held as soon as next week.