The Bernanke Fed caught a break this morning.
The December report on consumer prices shows that inflation returned to something approximating a manageable level. After November’s eye-popping 0.8% surge in CPI, December’s 0.3% looks like a gift, and a timely one. No, inflation hasn’t evaporated as a clear and present danger, but pricing pressures retreated enough in December to give the central bank a green light to drop interest rates by 50 basis points at the end of the month, when the FOMC meets.
The market expects no less. As we write, the February ’08 Fed funds contract is priced in anticipation of a 50-basis-point cut.
It’s clear that the economy’s slowing and may even be contracting. By that standard, slashing interest rates looks sensible. And thanks to this morning’s CPI report, inflation doesn’t appear to be an imminent threat, giving the Fed a clear path for firing up the printing presses at a higher rate in the hope that such action will head off a recession, or at least dull the economic pain.