The Fed Rate Decreases Are Probably Over

Two weeks ago we wrote...." But in this case the Fed may decide that lowering rates one more time could actually hurt. Yes, the Fed faces a tough decision---and no move or a smaller rate cut could be the result." Well, we could not have been more on-target with this theory. Obviously the Federal Reserve Board opted for a smaller rate cut and the notes released after the meeting this past week indicated that this may indeed be the last cut for some time. Why is the Fed about to end its rate-cutting campaign?

There are several possible explanations. For one, short term rates are so low there is not much room for more on the downside. If something bad happens, the Fed needs more ammunition in reserve. Secondly, higher oil and food prices make higher inflation as much a concern as a slower economy. Finally, the Fed may feel that the worst news is behind us. Though the economic news released in the past week was weak at best, the bottom line is that economic growth was positive. This is better than a recession. On the other hand, preliminary readings are subject to significant revisions.