The Federal Reserve cut the Discount and Fed Funds rate by 25 basis points today. The move was widely expected by economists and Wall Street. In their briefing, the Fed did mention the risks of inflation and the high prices of commodities on the economy.
They stated, “Some inflation risks remain, and we will continue to monitor inflation developments carefully.” The $90 crude oil was one commodity they specifically mentioned.
The Fed is going to have a difficult time wrangling inflation if they continue lowering interest rates. Lower rates will only lead to more demand for commodities and the dollar will likely continue to fall.
If the housing debacle and the credit issues are enough to force the US economy into a recession, we run the risk of stagflation. That is a situation where economic growth is slow and inflation is increasing. This undesirable dilemma occurred back in the 1970s. Even though our economic growth slows, other countries will likely continue to grow, thus pressuring commodities prices higher.
I believe the Fed is more concerned about inflation than they are letting on. They were almost backed into a corner where they had to lower rates today. It would be hard to justify a rate cut if they publicly put more emphasis on commodity prices and inflation. Time will tell how the economy shakes out, but commodities continue to be strong and lower interest rates and a lower dollar will only help push commodities higher.