It didn't take long for the Federal Reserve to act after this morning's announcement that last quarter's Gross Domestic Product (GDP) number - the key index in measuring the health of the U.S. economy -- was a lousy one.

For the quarter, GDP clocked in at a meager 0.6% - about one percent lower than most economists had anticipated. Market watchers say that businesses really put the breaks on spending during the last three months of 2007. Consumers did, too, but not as aggressively as U.S. businesses.

The low number set off a chain reaction of anxiety and disgust over the economic picture the U.S. is staring at. The low GDP number was bad enough. What may be worse down the line is the signal that inflation -- in the form of rising prices for things like oil, energy, health care, and even widgets and washing machines -- are rising. Normally, the Federal Reserve's decision to cut rates by another half-point, which was announced this afternoon, would be a welcome balm for a weakening economy. But with inflation on the rise, can the Fed afford to cut prime lending rates, send more money back into the economy, and force inflation up even higher?

It's a dichotomy that economists have long wrestled with. Rising inflation in a weak economy is known as "stagflation" and is viewed by economists with the same enthusiasm a disoriented vampire greets daylight.

So far, the Federal Reserve hasn't blinked in the face of recession.

In fact, it signaled that further rate cuts were possible.

Only last week, the Fed announced a surprise three-quarter-point cut which drove its key lending rate down to 3.5 percent. It was the largest reduction in this rate in more than two decades and the first change in the funds rate between meetings since the immediate aftermath of the September 2001 terrorist attacks.

Says Reuters today, "Many analysts believed the Fed would quickly follow last week's aggressive move with a cut of at least a half- point at its first regular meeting of the new year. That view gained support on Wednesday hours before the Fed announcement, when the government reported that the total economy slowed to a barely discernible 0.6 percent growth rate in the final three months of last year."

That's a pretty depressing read. The good news is that some economists, as reported by Reuters, said they "were still looking for just a quarter-point move by the Fed because other reports show the economy appears to be skirting a full-blown recession."

For U.S. companies, some solace can be taken by yesterday's 5.2% hike in manufacturing sales, especially for heavy equipment, aircraft, computers, servers and other big ticket items. It was the largest manufacturing sales increase in five months, according to the U.S.
Commerce Department.

Concludes Reuters, "Whatever the Fed does Thursday, analysts said that further rate cuts are likely until the central bank is sure that the economy is back on sound footing. Bernanke pledged in a speech on Jan. 10 to take decisive action to combat a slowdown. Many economists believe the funds rate could fall to 2.5 percent before the Fed stops easing."
Share To:

William Dorn

Post A Comment:

0 comments so far,add yours