The Fed "Zinger"

This past Monday, I opined that should the Fed choose to
blow off the speculators in the markets by standing pat
on Halloween, it would cause a ruckus. Well, the Fed did
cut the FFR and discount rates by 25 bp, but in its
statement it cited economic growth and inflation risk as
of equal concern, hoping folks would infer that it was
going to stand pat on rates going forward.

The message did not sink in right away, but today it did,
and with news of economic slowing and concerns about
Citibank's dividend in hand, market players took stocks
to the woodshed.

Since mid-August when the Fed addressed the fallout from the
subprime debacle more earnestly, oil prices have rocketed as
all know, and industrial commodity prices have surged at a
25% annualized rate. Inflation potential has been growing
quickly. The Fed's gambit here is to posture tough enough to
crack oil and materials prices in hopes of taking steam out
of the inflation thrust underway. The Fed knows that an
inflation surge domestically will punish consumer real incomes
and confidence down the road and damage the economy. So, they
hope to scare the commodities markets and the US dollar shorts
in the interim. The Fed knows only too well that capacity is
constrained in oil and industrials, but they also know there
is plenty of speculative interest as well.

Many market players appear to have all but dismissed inflation
in favor of tracking economic potential. Let's give it a week
or two to see if they can connect the dots, and whether an
apparently firmer stance by the Fed will shake out some of
the commodities speculators.