In light of the prediction, uncertainty surrounding when the Fed will begin to cut rates and by how much exists. The Chairman of the Federal Reserve, Ben Bernanke, has been tight-lipped about any plans regarding the cutting of rates and when these cuts will take place. There are many investors that are banking on interest rates to take place in 2007.
March 2007 is the month of change which is predicted by futures traders. However with the recent reports of high employment numbers, that prediction has been put off until May of 2007.
Futures traders see interest rates having been cut at least once- possibly two times by June 2007. On the flip side, Ben Bernanke has been quoted as saying that the question facing the Fed is not whether to cut rates, but to raise them in order to fight any inflation trends. Currently, "core inflation", not including important and volatile energy and food prices, continues to be higher than 2% annually. This current rate is higher than the Federal Reserve wants to be seen.
Inflation will need to level off more towards the 2% level before any cuts would occur. If inflation continues on an upwards trend, the Federal Reserve could raise rates to hold it back.
If inflation keeps moderating over the next few months and pulls back toward the 2 percent level, then the interest rate cuts may happen. But if inflation proves sticky and stops pulling back, the Fed could be forced to cool it off by raising rates.
The Federal Reserve is fearful of rising inflation. If these fears materialize we will see rate hikes, not cuts.
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