• I’d like to start with a less than encouraging quote from Fed chairman Bernanke: “Overall, the Committee expected that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate. Growth was seen as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane.”

    Unless the housing correction DOESN’T wane. A frightening thought, but one that must be entertained nonetheless. This will lean our country’s financial decision makers decisively towards a more facilitative policy.

    Inflation is on the horizon, and there’s really no way to stop it. High oil prices will percolate into all markets and drive prices upwards. The good news is that it doesn’t seem to bother the Federal Reserve one bit. Write-downs continue to plague the financial sector of the stock market, as re-valuations of collateralized debt obligations (which are chock-full of subprime mortgages) reduce overall portfolio values. Bad news for investors. Stock market continues to yo-yo on an almost daily basis, bouncing from gain to loss to gain again. Not necessarily bad news, but it will make the financial bulls a little more gun-shy.

    BernakeAll of this shifts the powers that be yet again from the ‘absolutely no chance of a rate cut at the next meeting whatsoever’ stance to the ‘we’ll keep our eyes on the numbers and act as necessary’ stance. That’s pretty close to where we were 1½ months ago and we ended up with a cut. Go figure.

    The weak dollar seems to be driving a lot of movement behind the scenes. For example, foreigners are vacationing here for cheaper, so Disney is rocking and rolling. A good thing for our local economy.

    My opinion on the future: Recession? Not likely. Anemic growth for a while? You betcha. Real interest rates, as measured by the Federal Funds Rate (4.5%) minus core inflation (1.8%) are still notably higher than the average “Goldilocks” level (not too hot, not too cold) of 1.5%. Additionally, a recent strong read on productivity will help stave off core inflation even longer. That would imply that the question is not if the Fed will cut rates again, but when.

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