Yet whatever the demand/supply dynamic, there comes a point in all markets when price reaches the limits of the economy's capacity to pay. It's already happened with housing in America, Britain and many parts of Europe, where the same arguments about insatiable demand on limited supply as are now deployed by bulls of the oil price were once used to explain and justify ever-rising real estate prices.

As we now know, a large part of the house price spiral was down simply to a ready supply of cheap credit chasing an asset which everyone thought immune to Newton's law of gravity. As a consequence, ever greater quantities of money were poured into the market, until it eventually became essentially unaffordable. Prices are now correcting accordingly. Many of the same bubble characteristics are observable in the commodity markets, and particularly the oil price.

In the last year, the oil price has nearly doubled, a rate of appreciation which in absolute terms is without precedent. Admittedly, the oil shocks of the 1970s were in proportionate terms much worse. In the first of these shocks, the price quadrupled and in the second it doubled again.

Yet even accounting for inflation, the price today is much higher than it rose to back then. The effect, given the short time frame of the appreciation, could therefore be just as profound.

Western economies will be better at absorbing these increases than they were back then. Europe in particular is partially protected by the strength of the euro, which means the effective appreciation for single currency members is only half as much as it is in the US. All the same, the pain is already acute, with energy-intensive industries such as airlines facing profound structural change as they seek to adapt to expensively priced oil.

Though the focus of attention has been on the damage done to the full service airlines, the first casualties in the airline industry are likely to be among the low-cost operators, which rely on highly price-conscious customers. What's more, already finely tuned cost structures make it harder for them to absorb high fuel prices by economising elsewhere.

As energy and fuel bills rise, consumption is likely to suffer across the board, threatening a return to the "stagflation" of the 1970s. Even so, the West isn't as dependent on oil as it was back then and, as I say, per capita consumption of energy in the developed world is already so high that it can easily be reduced without causing undue hardship.

The pain caused in the developing world is, on the other hand, likely to be much more extreme. Here there is little room for reduced energy consumption. As higher energy and food prices eat into already squeezed family budgets, there is the threat of serious economic and social dislocation.

Yet the bull case for the oil price depends on this demand continuing to rise in an almost exponential way. In fact, very little has happened to the mix of supply and demand over the last year which in itself would justify a doubling of the oil price. What has changed is the willingness of markets to believe that growing demand underpins a permanently higher oil price. As with housing, that's likely to be only partially true.

As with all bubbles, it is impossible to know when prices will correct. The oil price could as easily go to $200 a barrel before once more returning to earth. Yet return it certainly will if it succeeds in pushing the global economy into recession. Central bankers seem to be succeeding in insulating their economies from the worst effects of the credit crisis. They may find the oil price an altogether tougher nut to crack.

www.independent.co.uk

Earnings from a handful of major retailers, including Target (TGT.N: Quote, Profile, Research), could shed more light on how much the rising costs of fuel and food and deteriorating home prices are affecting consumer spending. Investors also will be keeping a keen eye on inflation data.

"If oil prices continue to move up, with Memorial Day coming up, I think traders and investors will be very cautious," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.

The Memorial Day holiday in the United States typically marks the start of the summer driving season.

For the week, the Dow Jones industrial average gained 1.9 percent, while the Standard & Poor's 500 Index .SPX advanced 2.7 percent and the Nasdaq Composite Index .IXIC climbed 3.4 percent.

At the close on Friday, the S&P 500 was within 3 percent of being in the black for the year, while the Dow needs to gain about 2.2 percent and the Nasdaq about 4.8 percent.

THE FED'S DILEMMA

With the economy still on shaky ground, investors will pour over minutes from the Fed's last policy-setting meeting, due to be released on Wednesday, to glean clues on the outlook for interest rates. Policy-makers face a dilemma as they seek to balance their concern about rising inflation pressures against a wish to stimulate the flagging economy by continuing to cut interest rates.

In recent weeks, Fed officials have been fretting primarily about inflation and have indicated that they would prefer to hold the line on the fed funds rate at the current level of 2 percent.

Rate futures, for now, are taking the Fed at its word, showing a minimal 10 percent chance for another rate cut at the next policy meeting in June, compared with a 90 percent chance that rates will be kept unchanged.

Apart from the Fed minutes, investors will hear from three Federal Reserve Board governors -- Donald Kohn on Tuesday, Kevin Warsh on Wednesday and Randall Kroszner on Thursday. In addition, Federal Reserve Bank of Chicago President Charles Evans will speak at an event on Friday.

Given the recent focus on inflation, the U.S. Producer Price Index will be a key data point on Tuesday. Overall PPI for April is projected to increase 0.4 percent, according to economists polled by Reuters. In March, the headline PPI jumped 1.1 percent.

Core PPI, excluding volatile food and energy prices, is forecast to rise 0.2 percent, the Reuters poll showed. In March, core PPI gained 0.2 percent.

On Wednesday, a government report unexpectedly showed that the Consumer Price Index, another top inflation gauge, grew less than expected in April.

As first-quarter earnings season peters out, companies left to report earnings include Target, Home Depot (HD.N: Quote, Profile, Research), Staples (SPLS.O: Quote, Profile, Research) and Gap (GPS.N: Quote, Profile, Research). So far, retailers' earnings have been mixed, depending on how they were able to cope as consumers scaled back their spending.

YAHOO! DRAMA AND HOME SALES, TOO

Any new developments in the Yahoo! (YHOO.O: Quote, Profile, Research) and Microsoft (MSFT.O: Quote, Profile, Research) saga could also determine the market's direction next week. Financier Carl Icahn has launched a campaign to replace Yahoo's board with directors who would reopen talks with Microsoft saying Yahoo acted "irrationally" in refusing the software company's $47.5 billion bid.

"More merger and acquisition activity in technology could shift the market to the upside, particularly the Nasdaq," Kumar said.

Existing home sales for April, due on Friday, are expected to slip to an annual rate of 4.85 million units from 4.93 million the previous month, according to economists polled by Reuters.

"Everything ties back into the consumer," Hellwig said. "If there's more deterioration in existing home sales than people expect, it will put more focus on how that affects the consumer, for whom their house is typically their biggest asset."

(Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)

© Thomson Reuters 2008 All rights reserved

That has suggested to markets that the U.S. central bank may indeed be through with interest rate cuts -- and just when softer euro zone data has suggested that the Eu ropean Central Bank may have all its rate-cutting ahead of it.Fed governors Donald Kohn, Kevin Warsh and and Randall Kroszner are all slated to give speeches next week and currency market participants will keep a close watch.

Analysts said the shift in the relative interest rate outlook should continue to favor the dollar over the euro.

"If I were running a trading desk, now would be the time I'd authorize traders to go long the dollar overnight instead of short," said John Browne, senior market advisor at Euro Pacific Capital in Darien, Connecticut.

Whether a dollar rally can be sustained, though, will depend on the Fed, he said, and when it acts to tighten monetary policy.

A thin U.S. economic calendar this week may not provide much indication of future Fed policy this week. The one key indicator will be Tuesday's producer price index for May, which will be watched closely for signs of inflation.

The Fed has cut rates by 3.25 percentage points to 2 percent since September, though its last cut in April came with a subtle suggestion that it may be its last for some time.

Analysts said minutes from its April policy meeting are unlikely to provide much news on the Fed's thinking regarding monetary policy or the economy.

"It's probably a bit too early to say what the Fed does next, but it is becoming more and more likely that they are done cutting rates, barring a major collapse at some big financial firm," said Dustin Reid, senior currency strategist at ABN AMRO. "That's getting priced into the dollar."

The currency market will pay close attention to incoming euro zone data, particularly Tuesday's ZEW survey of German business confidence.

The median estimate of a Reuters survey is for a slight improvement in the indicator, though any sign of deterioration in the euro zone's biggest economy should bolster expectations of more sluggish growth ahead.

(Editing by Richard Satran)

© Thomson Reuters 2008 All rights reserved

Dictionary.com defines inflation as “a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency”. American Heritage says inflation is “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services”. I added the italics for emphasis.

So if anyone ever tells you rising prices are inflation, realize they either don’t know what they are talking about or they are intentionally trying to mislead you. Rising prices are only inflation if they are directly caused by an increasing money supply. The problem is rising money supplies often coincide with supply imbalances in specific commodities, so usually both inflation and simple economics are co-drivers.

For example, global oil demand is growing as China, India, and the rest of the developing world drive more cars and transport more goods. But supply growth can’t keep pace, as big new oilfields are exceedingly rare. So much of oil’s bull is fundamental, it has nothing at all to do with inflation. But at the same time, oil priced in euros has risen slightly less than half as much as it has in dollars. So about half of the oil bull seen by Americans is largely driven by dollar inflation.

So as you live your life in constant sticker shock this summer, realize that varying large fractions of the rising prices you see are purely fundamental. Global demand is straining global supplies. Rice is a great example of this today. But the remaining fractions of price increases we are seeing in the States are the result of true monetary inflation. You can thank the Federal Reserve for this unwelcome development.

The Fed is the greatest engine of inflation the world has ever seen. Its only function is to create new US dollars out of thin air, every one of which is pure inflation. Every second of every day, the Fed ramps US money supplies at much faster rates than underlying US or global economic growth. The result is higher prices thanks to relatively more fiat-paper dollars bidding on relatively fewer real goods and services.

And as if the steep fundamentally-driven price increases we’ve seen in oil, gasoline, and the grains are not bad enough, Ben Bernanke’s Fed is pouring rocket fuel on this fire. The Fed is so worried that some real-estate speculators might actually have to take responsibility for their own bad decisions that it is flooding the market with inflationary new dollars at a truly breathtaking and frightening pace.

While it is a case of the fox guarding the chicken coop, the offending Fed maintains measures of various money supplies. For nearly half a century, the M3 measure of US money was the broadest measuring stick. But the Fed suddenly discontinued this popular measure, without explanation, in early 2006. Conspiracy theorists pointed out M3 had been growing much faster than M2, so perhaps the Fed was trying to hide this. And provocatively M3 was killed right when Ben Bernanke officially took the helm.

When the Fed took my M3 away, my replacement favorite broad money supply measurement became MZM, or money of zero maturity. It is equal to the M2 money supply less time deposits (like CDs) plus money-market funds. It effectively measures the supply of US money redeemable on demand, hence available for immediate spending. While economists argue about whether M2 or MZM is a better broad measure, my research leads me to cast my vote with MZM.

And if you look at MZM growth today, it is frightening. While the Fed and Keynesian (socialist) economists argue that money-supply growth is largely out of the Fed’s control, this is a foolish thesis. If the Fed shut down its proverbial printing presses and stopped bullying around free-market interest rates, money supply growth would plummet and inflation would soon evaporate. Make no mistake, the central bank issuing the currency is to blame here!

This chart renders the Fed’s annual year-over-year growth rate in MZM along with the YoY growth rate in Washington’s lowballed Consumer Price Index. Wall Street generally accepts the CPI gospel on inflation, so I included CPI growth here as well to show how ridiculously improbable it is given true monetary growth. The raw MZM is rendered in the background. Its accelerating growth is very disturbing.



In Alan Greenspan’s final years at the Fed leading into early 2006, the blue MZM YoY growth rate was trending lower. It was always still positive, so money supplies were growing. But monetary growth only becomes inflationary when it exceeds the growth rate in stuff on which to spend it. If money is growing at 3% a year but the US economy is also growing at 3%, then little or no monetary inflation will be witnessed.

The week Greenspan left office, I wrote an essay on his monetary legacy. He did a horrible job. Like a Communist boss in old Russia, he continually tried to manipulate prices and failed. At the time, I thought he was one of the greatest inflationists in history. But after seeing Ben Bernanke’s sorry record since he took office, it is crystal clear that this new central banker is trying to radically out-inflate his predecessor.

Left with low broad money growth by historical standards, Bernanke’s Fed soon started accelerating it in late 2006. Then in early 2007 the subprime crisis erupted, and the Fed panicked. Rather than letting reckless real-estate speculators (both banks and mortgage holders) go under and clean out the system, the Fed rewarded them. It started ramping money way faster in the curious hope endemic to central bankers that more cheap money will magically fix an imbalance that previous cheap money created.

Until this point, MZM growth was still near 8%. This is faster than economic growth and definitely inflationary, but all over the world central banks inflate their own currencies by 7% to 8% a year on average. So 8% in early 2007 was on the high side, but still reasonable in light of fiat-currency history. But as subprime problems snowballed, the general credit crunch hit last summer.

Again Bernanke’s Fed, rather than trying to fight inflation and preserve the dollar’s purchasing power, decided that its real-estate speculating buddies in the banking industry shouldn’t have to bear the fruit of their own bad decisions. By the end of 2007 monetary growth was running a scary 12%, but it was stabilizing. The Fed was gumming up healthy free-market cleansing action with floodgates of new money.

Then in early January 2008, the global stock markets sold off aggressively. Fears of an impending US recession drove heavy selling overseas. This worldwide selloff was so extraordinary that we are unlikely to see anything resembling it again for decades. But instead of reining in monetary growth, the Fed accelerated it. Absolute annual MZM growth peaked at a staggering 16.7% in March 2008!

You read that right. There were 16.7% more US dollars available for spending this March than last! This is incredible, especially during challenging times when the US economy was barely chugging along around 2.2% growth for all of 2007. Sooner or later all this excess money will eventually bid up prices. Some of this inflation will be perceived as good, primarily the part that flows into stocks. But the part bidding up scarce food and energy is not going to make Americans very happy.

Now these growth rates defy the imagination. At 12% growth compounded annually, it only takes 6 years for something to double. At 16%, this drops to well under 5 years. If the Fed doesn’t stop this madness, there could be twice as many dollars floating around in 5 or 6 years as there are today. Even with modest economic growth, this means general price levels would probably almost double. And this inflation is totally above and beyond all the supply-and-demand-driven global commodities bulls’ increases!

Bernanke’s Fed has been ramping money-supply growth so fast that actual MZM is starting to look parabolic even on a short-term chart. In just over 2 years under him, MZM has ballooned 25.1% unchecked! And since the Fed almost never shrinks money supplies, all the inflation evidenced in this parabola is already in the pipeline. Eventually this excess money will filter into and really drive up general price levels.

Now since MZM includes money-market funds, stock-market performance does affect it too. So some analysts argue that this staggering MZM growth is largely the result of market turbulence. This thesis is problematic though. Whenever stocks change hands, so does cash. Buyers’ money is transferred to sellers’ accounts where it is still, amazingly enough, money. Unless cash is routed into time deposits like CDs, stock buying and selling shouldn’t affect MZM all that much. This same logic applies to bonds.

Another interesting point is MZM really started accelerating in late 2006. But the US stock markets didn’t top until one year later. In the year leading into its October 2007 top, the S&P 500 surged 15.9% higher. This is a great year highly unlikely to drive heavy stock selling and cash accumulation. Yet MZM still soared by 11.9% over this very span. The Fed recklessly running its printing presses was the culprit, not stock selling.

Thanks to this incredible monetary spike, a massive growing gap exists between the annual CPI growth and the annual money growth. Since monetary growth is the direct driver of all true inflation, shouldn’t the CPI reflect this MZM surge eventually? Theoretically yes. But since the CPI has become a US government propaganda tool rather than an honest inflation gauge, it probably won’t. Nevertheless, this MZM surge will certainly flow into real-world inflation and drive up general price levels of nearly everything we consume.

Now the 5 years rendered in this first chart really isn’t all that long. While 16% MZM growth is staggeringly extreme over this short span, is it extreme relative to history too? Absolutely! This next chart zooms out to the past 20 years to provide perspective. Bernanke’s Fed is really pushing the limits monetarily, blasting out shiny new fiat dollars at the fastest rate in decades with the exception of the 9/11 crisis.



The incredible acceleration in YoY MZM growth rates in 2007 is even more apparent in this long-term chart. And the post-9/11 high is very telling. By the looks of this, the Fed sees bailing out real-estate speculators as its highest priority since trying to maintain a functioning economy in the intense fear and uncertainty after the September 2001 terrorist attacks! The Fed is clearly scared today, and it is doing the only thing it can do. Inflate.

Bailouts are terrible for capitalism, even for the people getting bailed out. When speculators make bad decisions, they should face the full consequences so they learn from their mistakes. Failures are good because the assets used inefficiently and unprofitably by the bad speculators are naturally redistributed by the markets to those who will manage them efficiently for profits. Yet the Fed willingly keeps short-circuiting this important process which keeps making matters worse.

In late 1998, the Fed ramped money supplies to try and stave off necessary deleveraging following the Russian debt default that led to the implosion of elite hedge fund Long-Term Capital Management. But that deluge of cash soon found its way into stocks, particularly the speculative tech sector. The Fed’s LTCM bailout directly led to the tech-stock bubble by providing the surge in liquidity that drove the latter parabolic.

Then when the tech bubble burst, Alan Greenspan desperately tried to bail out stock speculators by slashing rates and radically ramping monetary growth in early 2001. Later that year when MZM growth was already 16% yet stocks kept grinding lower, the 9/11 attacks hit. So the Fed flooded the reeling system with even more newly-created money and pushed MZM nearly parabolic with staggering 22% annual growth!

But all this excess cash had to go somewhere too. Eventually all money the Fed creates will bid on something. Greenspan’s massive monetary growth in 2001 directly led to the housing bubble that he brazenly tries to accept no responsibility whatsoever for today. The torrents of excess money, which the Fed refused to take back out of the system after 9/11, flooded into real estate. And then that bubble started crashing in late 2006.

See the pattern here? The Fed gets scared because some speculators might actually lose on their bad bets so it floods the system with money to help them. But all of the money created in these huge surges eventually has to find a home somewhere, so another bubble is born. And then that bubble pops, scaring the Fed more. So it ramps money growth again, birthing a new bubble. It is a nasty vicious circle.

Other than abolishing the unconstitutional abomination that is the Federal Reserve, which isn’t going to happen since Washington would then have to live within its means financially, all we can do is try and anticipate the Fed’s bubbles and deploy our capital to ride them. Without a doubt, the massive surge in MZM under Bernanke is going to go somewhere. I suspect it will flow into and eventually create bubbles in the next hot sector, commodities.

It is ironic that the surges in money never go into the sector the Fed is trying to bail out. The tech-stock bailout attempt went into housing. And the housing bail out is already starting to flow into commodities. This is a serious problem for the Fed. When monetary inflation hit tech stocks and housing, people saw it as good. But when monetary inflation hits commodities, most folks aren’t going to be thrilled.

Despite their surges so far, commodities are not in bubbles yet because the majority of mainstream investors aren’t heavily involved yet like they were during the peaks in the tech-stock and housing bubbles. Bubbles are impossible without popular manias. And if Bernanke’s inflation indeed flows into commodities, they could prove to be the biggest bubbles yet. This money inflation gravitating towards an already fundamentally-hot sector is like a perfect storm of bullishness.

Today something like 2/3rds of the world’s population is starting to strive to live and consume like we blessed few do in the first world. Yet the world’s commodities-producing infrastructure was never designed to cope with such immense and fast-growing demand. It will catch up eventually, but prices will have to rise and stay really high for a long time to entice enough new capacity online to supply increased consumption.

So even if we were on a gold standard with no fiat-paper inflation whatsoever, commodities prices would still have to rise tremendously. But to have such a fundamental secular bull coincide with massive monetary inflation is incredible. Relatively more dollars bidding on relatively fewer already-fundamentally-scarce commodities is going to seriously amplify these bulls. And eventually the general public will flood in to speculate leading into the final apex, driving a superspike like never before witnessed.

Accelerating monetary inflation on top of global supply shortfalls is a truly incendiary mix. It leads me to believe we haven’t seen anything yet in commodities. At Zeal we’ve been riding these commodities bulls since the early 2000s. We were early contrarians starting way back when everyone thought commodities would never rise again. Since then our subscribers have made fortunes mirroring our trades.

So if you want to thrive in the coming inflationary times, subscribe today to our acclaimed monthly newsletter. We are constantly researching the markets, looking for high-potential opportunities in commodities stocks. You can learn from our hard work, see the logic behind all our real-world trades going forward, and mirror them with your own capital as you wish. The opportunities approaching are immense.

The bottom line is the commodities price increases we have seen lately are not all inflation. A large portion, the majority in most cases, is due simply to global imbalances in production and consumption growth. Inflation is purely a monetary phenomenon, it has nothing to do with supply and demand in individual commodities. It has everything to do with relatively more money chasing after relatively fewer goods and services.

But while investors wrongly attribute too much to inflation today, a massive surge in real inflation is already baked into the pipeline. Bernanke’s Fed has flooded the markets with cash in a futile attempt to bail out real-estate speculators. This new money has to go somewhere, and it will probably be commodities. We may as well buy in ahead of it and reap the big profits to come.

Adam Hamilton, CPA

May 16, 2008

Central Bank bailouts, as credit crisis expands, drive gold and commodities

Several dynamics caused this gold correlation to the credit crisis. One was massive central bank bailout activity. Although few actual ‘bailouts’ happened by name, we had the BoE bailout of Northern Rock, the ECB bailouts of several big banks, and the Fed bailout of Bear mid March.

There have been a lot of other central bank bailouts indirectly. The ECB and the Fed have both been offering longer term credit facilities to banks and financial institutions, to the tune of $1 trillion so far, depending on how you count it. They have added a cumulative $2 trillion to the credit markets since August of 07, depending on how you calculate it. And, most importantly, the ECB and the Fed have allowed banks to exchange their illiquid mortgage bonds/derivatives for borrowed capital, to the tune of hundreds of $billions each.

Obviously, as the Fed combated the credit crisis with interest rate cuts, the USD fell. Of course gold followed that by rising. The same can be said for what the ECB was doing, mainly from their massive bailouts, but not rate cuts.

Without all these measures, the western financial system would have totally collapsed. So far, at least, the worst case scenarios have been avoided. The credit system is still in big trouble, but it might be said the worst was avoided so far. As of now, there is some significant corporate bond issuance happening in the US finally, within the last several weeks. It is notable that gold has sold off heavily in the same time.

Gold and commodity bubble driven by funds

The second driver for gold and commodities since August was that investment funds of all types had to bail out of the financial sector, and also out of many stocks in general. That money cannot just sit there. So, a commodity and gold bubble ensued. So, gold rose to over $1,000 in a few months. Oil and other commodities also followed suit rising dramatically.

Once it looked like the credit crisis might be abating after the Bear bailout (still a very dicey proposition) funds and others decided to switch back into other stocks and sectors, and take profits out of gold and commodities. Even oil appears ready for some of this profit taking.

The reason gold is down about $170 since its $1,030 high appears to be due to a perceived improvement of the world credit crisis, since exactly when the Bear bailout occurred the middle of March 08.

The correlation of gold to a worsening credit crisis, and then gold’s turn right after the Bear bailout is striking. Take a look at this chart:



We do not believe that gold is out of whack. What is happening is that gold is returning to its general up channel, as the world economy slows and central banks cut interest rates. Gold was way above its general up channel following the onset of the credit crisis. Gold will remain in a long term uptrend, once it returns to its general up trend channel established before August 07, if stagflation remains with us.



But for now, the mild improvement in the credit crisis after the Bear bailout has allowed funds to jump back into other investment sectors, and take profits in commodities and precious metals.

The FOMC clearly remains concerned about the economy, which is unsurprising given souring confidence, deteriorating labor market conditions, and the housing collapse that is far from over. Furthermore, credit markets remain very tight and the financial markets remain under stress, which is why the Federal Reserve has been so keen to boost liquidity via the creation of new and expanded lending facilities. However, it is worth noting that the FOMC called their past easing of monetary policy “substantial.” This comment along with concerns that “inflation expectations have risen” and their high uncertainty about the inflation outlook suggests that the rate cut cycle may be nearing an end.

The markets remain extremely choppy following this rate decision, as the US dollar, Treasuries, and DJIA have yet to make any sort of significant directional move. View our FOMC Preview from Wednesday for our view on how EUR/USD could play out.


Comparing the FOMC statements **New Language Highlighted

April 30, 2008

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 2 percent.

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 2-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Atlanta and San Francisco.

March 18, 2008

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.




Written by Terri Belkas, Currency Analyst for DailyFX.com