Many of the most pessimistic analysts have expressed concern about the Fed’s move back to a rate cut philosophy given the ongoing price and inflation challenges. The Fed had been on hold with rate cuts for a while after a strong series of cuts in late 2007 and the first half of 2008 that brought the Fed funds rate to two per cent. The Fed paused about halfway through 2008, believing the economy might be prepared to push higher off its bottom.

Timing was important for the decision to hold rates steady. Earlier this year, some economists expected stagflation to become an alarming issue. Fed Chief Ben Bernanke even addressed the potential issue earlier this year. Rate cuts were used to spark the economy. This was in contradiction to the high inflation readings that are often handled with rate increases. However, the Fed remained steadfast in driving the economy even at the risk of moderately high inflation.

Record high wholesale and consumer prices, as well as record low levels for the dollar were the norm earlier in 2008. Obviously, the credit crisis has forced the Fed to renew its focus on rate cuts to encourage credit flow and economic growth. The Fed collaborated with several leading global central banks in a move to combat growing concerns about carry over effects of the US troubles.

The good news on Thursday (October 16) was a report that showed US consumer prices were flat during September. This alleviates a bit of the pressure on the Fed and allows them to focus on the economy and specifically, the credit sector. Most analysts expect more rate cuts in the coming weeks. Flat prices make this more likely.

Sharp declines in gasoline, clothes, and new car prices helped offset rises in areas such as food and medical care. Gasoline has seen tremendous price declines since mid-July which has been a huge reprieve to inflation. The dollar has surged powerfully against most major currencies during that time as well. The dollar has tended in recent history to gain when oil and gas fall, since oil is something the US relies on from foreign providers. A stronger dollar, lower gas, and some better prices on fashion and car buys have helped create the flat price growth and enable the Fed to aggressively pursue economic growth.

The Core consumer price index, which gauges price trends excluding gas and food, showed just a .1 per cent increase during September. This followed up a .2 per cent increase during August and demonstrates a trend toward flattening price growth.

As the government begins it intervention into the credit markets and Americans partake of the last few weeks of presidential campaigning, investors are playing out the emotional ups and downs felt by most Americans daily. Wednesday, the Dow dropped another 733 points, but followed it up Thursday with a 401 point rebound. In the current equity investment markets, even a minor catalyst in either direction can potentially gain steam, as emotions are high and there are plenty of anxious traders ready to jump in or dive out of the market at a moments notice.

Market Recap

The Dow was hammered again Wednesday as the emotional roller coaster took a dip. The blue chip index gave back 733 points on the day. An upswing Thursday helped carry the volatility another step. The Dow gained 401 points. Positive third quarter earnings for Google was a strong catalyst. Consumer prices were unexpectedly flat in September. The dollar surged higher against the Euro. The NASDAQ and S&P were up 89 and 38 points respectively.

Neil Kokemuller
Thursday, October 17, 2008
11:23 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.