Thursday, February 21, 2008

Fed minutes reveal downside risk to the economy

The minutes from the last Fed policy meeting revealed that there was still downside risk to the economy even in the wake of a massive reduction in interest rates. What was very interesting was the revelation that some officials said a “rapid reversal” of recent policy easing might be needed once the economy stabilises. That suggests that the Fed’s aggressive stance on interest rate movements will be twosided, both when rates are falling and when they eventually rise. CPI data rose last month which will make the Fed think about inflation worries, but it doesn’t look like it will be enough to halt their aggressive stance of rate cuts as yet. Home construction in January also rose but only slightly. The dollar had a slight rally against the pound but fell back to where it had been before the release of the data. Against the euro it is still range bound between $1.4710—$1.4750.

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