Will inflation put the brakes on Ben's interest rate cuts?

Doubtful. The headline inflation is a huge issue and should definitely be considered, but in truth Ben is picking and choosing his interest rate...which means he is sticking with the Core inflation rate. To be honest, if we consider the home inflation rate, in conjuction with the headline, we actually have been suffering with an 8-10% inflation rate. the housing issue corrected itself, which leads me to believe so too will the headline. But I am just %26#039;that kind%26#039; of economist.

The principal issue with the headline being so high is the impact the oil prices had on fuel, which then translates into food manufacturing and shipping. The biggest culprit to this increase was the decling value of the dollar, which has been steady since 99/00.

This is why I am doubtful Ben will stop lowering the rate. I think the Fed will lower the next rate by 50 basis points with another 25 to 50 in the months to follow. This is largely due to their fascination with the core inflation rate, as the headline can easily be explained away as being the result of the declining dollar value, with inflation%26#039;s impact on the dollar value being nominal.

Now the USD saw a 4% bounce in Q4 of 07, and is expected to see another 4% bouce this quarter. This will naturally adjust the headline inflation numbers for this quarter and will serve to encourage Ben in his current reasoning to continue the lowering process.

Will inflation put the brakes on Ben%26#039;s interest rate cuts?

No. For without the intervention of the Congress to rein in the Federal Reserve Bank, and the declining purchasing power of the falling dollar in the currency markets , Wall Street will demand for more interest rate cuts. The fact that the Dollar has no other commodity backing, like gold, silver or as outrageous as this may sound, corn. Lack of Congressional oversight of the Fed is the primary reason that the interest rate cuts have no real world impact on fighting Inflation in a devalued Dollar market. High Oil prices are one factor that the purchasing power of the Dollar has fallen. Devaulation of the Dollar on the currency market and its falling purchasing power are another. Until these factors are adressed Inflation will rise and the Fiat paper money of the FED printing more will flood the market causeing an oversupply of a devalued currency.

Will inflation put the brakes on Ben%26#039;s interest rate cuts?

Inflation will absolutely not stop the FED from cutting its target FED funds rate. The FED funds rate is now way above the 3-month t-bill yield and almost equal to the 30-year yield! That is crazy, the FED has a long way to go before the cuts are done.

By the way, I read your response to a question about Keynes and a possible recession. The piece was written a month ago and you responded with (...should the US economy go into recession (which it hasn%26#039;t yet, despite all the talk about it). How you could write that 1 month ago and not realize recession was imminent is beyond me. Over a year ago, I predicted a recession for 4th quarter 2007/1st quarter 2008 . On top of that, I was almost 100% certain about 2 months ago that recession was imminent or we were already in one, the leading indicators were all flashing bright red.

Will inflation put the brakes on Ben%26#039;s interest rate cuts?

I don%26#039;t think it will for two reasons.

1) I agree with the skepticism above about the core inflation rate and the Fed tending to cut rates if they can justify it, even weakly.

2) The nature of the credit meltdown has given them a lot of freedom in this regard. Even with the Fed cutting rates, the rest of the tranmsisison mechanism (bank lending, securitizations, mortgage companies) have all gone from creating credit as fast as they can to slowing down (or in some cases shutting down). With credit as tight as it is, the Fed will not be risking much inflation by cutting rates.

The catch is, they will be setting us up for inflation once the credit markets settle down in 12-18 months.