Stagflation or "stagflation-lite"?
2 Dec 07

The Fed faces a difficult decision on 11th December whether to cut rates or not. Bad news keeps hitting the headlines making it very hard for Bernanke - a housing downturn, high oil prices, a falling dollar and food prices spiralling up. But the mess in the financial markets is one of the more major threats.

The uncertainty comes from prospect of slower growth (somewhere betwen 1.8% and 2.5% next year) and higher inflation.

Countries holding huge reserves of dollars are feeling less confident as the dollar declines. China currently holds $900bn of the $3,700bn global dollar reserves. These countries want to be less dependent on the dollar but if they sell their dollars, it will only fuel a further fall. A rate cut would put further pressure on the greenback.

Links:
Fed faces a fine balancing act on rates - The Sunday Times (2 Dec 07)