Have No Fear; More Interest-Rate Cuts Are Almost Here

A little late to joining the “slower growth” party:

Yesterday, the U.S. Federal Reserve lowered its official growth forecast for the economy for 2008 to a median of 1.65%. This revision is sharply lower than the Fed’s previous 2008 growth estimate of 2.2%.

(For economic number junkies, the last time the American economy grew less than two percent was back in 2001-2002, when the U.S. last suffered a recession.)

As we all know, the Federal Reserve reduced interest rates by one and one-quarter percent in January to kick-start the economy. Concern arose yesterday in the financial markets that the Fed would not be able to cut interest rates much further because of rising inflation.

Wednesday, the Fed raised its official inflation target for 2008 to a median of 2.25%, up from its previous forecast of 1.95%. Also Wednesday, the U.S. Labor Department said that consumer prices rose by a greater than expected 0.4% in January.

What does all this mean for investors?

Economists are getting concerned that higher inflation in the U.S. will limit how many interest-rate cuts the Fed can deliver in the future. If we take the December and January Consumer Price Index (CPI) numbers, inflation in the U.S. is running at 4.4% per annum!

As for this economist, I don’t buy it yet. I’m still stuck on deflation. I see housing prices falling, stock market prices falling, and costs of goods and services falling (especially if they can be imported from Asia). The only thing I see rising is oil prices, and oil prices make up very little of the core CPI.

The most important statement I saw yesterday came out of the Fed:

It sees “further intensification of the housing market correction, tighter credit conditions…ongoing turmoil in financial markets and higher oil prices.” In plain English, I read this to say, “We are ready to drop interest rates again.”

As they might say in a movie preview: Coming this March 18… more interest-rate cuts headed your way. (March 18, 2008 is the next time the U.S. Federal Reserve meets to set its interest-rate policy.