Rate Cuts? What About Inflation?

At no time over the past two years has any mention been made of inflation pressures reducing, and up until just last week we have heard that inflation pressures are still at the fore of central bankers' minds. The Bank of England, the ECB, the Swiss National Bank, the Federal Reserve, and the Reserve Bank of Australia, have all stated that inflation has held them back for looking at any kind of rate adjustments. We have been told, and can see in what we pay each day at the check-outs, that inflation really is an issue, and in a low interest rate environment we will now see inflation strip further the gap between 4-5% inflation, and 1.5% interest rates.

The 3% gap in the U.S., and the 1-2% gap regionally, between interest and inflation rates have been ignored in the rate cuts on Wednesday, but make no mistake that these cuts will be reversed as quickly as possible in an effort to maintain price stability. The ECB, for example, have hung their hat on higher inflation rates, forcing them to hold rates higher and right now, will need to see a dramatic return on their gamble to cut. That pay-back will come in the form of equity markets moving higher, confidence returning, and consumers re-setting their budgets on the back of a floor being put in on their investment portfolios, and house values.

If the rate cuts do not quickly boost the equity markets there may be another round of cuts, but at such a high forward cost in inflationary terms that most central banks will be very reluctant to do so. The global future just got mortgaged, and to an equity market that may not be qualified to take the loan. Pandora's Box has been opened, the markets now have to deal with expectation, and that is nothing to get excited about right now.

Comments

[Smarty_Pants:]

The FED is desperately trying to keep the economy from imploding.

Like a drowning swimmer, they are grasping at anything they can to keep their heads above water without concern for anything or anyone else. They are simply trying to survive TODAY. They will deal with tomorrow's problems tomorrow.

2008 Oct 09 03:07 PM

[JasonC:]

The article writer is stark raving mad. This is deflation on an epic scale. Demand for money is not a constant, and right now it is infinity. That is why all future claims are being discounted to zero value, and only something liquid tomorrow has any. The time horizon of the entire civilization has shrunk to a matter of weeks. And this fool is worried about inflation! If authorities pull out all the stops, the price level might only fall by half. If they don't, try 10-fold.

2008 Oct 09 03:41 PM

[Inzight:]

Inflation is a distant second worry to the Feds Reserve now

Beside we all know the real dollar inflation is much much higher than 4% that is being broadcasted ... just look at food prices and commodity prices. USD rise and fiat dollar rise is a false rally - commodity hasn't taken off yet

Just look at NY Time's Zimbabwe article and tell me i'm wrong - failed government in massive debt printing money = people lining up at 4am for a whole day just to have enough to buy a bar of soap

mining101.blogspot.com

2008 Oct 10 01:21 PM