Yesterday's quarter point cut was very much in line with market expectations, reflecting a Fed that, although remaining weary of the risk of a housing spillover, was reacting more to the build up in anticipation in markets that are still reeling from the July-August shock. With the most recent economic releases suggesting more inflationary risk (tight labor markets, high capacity utilization and a surprisingly strong third quarter GDP) to come and a weak dollar with oil trading at record levels, the Fed took the opportunity to clarify its stance as to the future direction of rates. The message was there was far too much uncertainty in the markets and that the future direction of rates would depend on how the current crisis unfolds.
Although the housing slump seems to be contained for the time being, tightening lending standards and higher gasoline prices at the pump are bound to influence spending patterns. To counter this we have the weaker dollar combined with healthier growth outside of the U.S. but there is talk that certain emerging markets, most notably China, are entering or are already in a bubble. The longer this remains true, the more difficult it will become to engineer a soft landing.
