Smith Faculty Opinion Article	May 2008
By Dr. John A. Haslem, Professor Emeritus                                                                       E-MAIL       WEB SITE

The 30 Seconds Outlook
May 1, 2008

"I’ve seen a heap of trouble in my life, and most of it never came to pass."
Mark Twain

The last action of the FOMC further lowered the Fed funds rate below the rate of inflation. Once the impacts on the credit markets have been assessed to be positive, the Fed must return to its stated focus last summer on inflation. Since the first funds rate reduction in September, oil prices have increased 39% and the index of commodity prices, 24%. These huge price increases have yet to be reflected fully in domestic price levels. Since 1995, and over 30% in the first quarter this year, the broad money supply has increased more rapidly than gross domestic product. Once the more rapid recent growth in the money supply brings inflation to the fore, the Fed must respond like a classic central banker, which, by the way, should strengthen the dollar. The Fed will have to retrace its series of Fed fund rate reductions until the funds rate is above the rate of domestic inflation. These will also be difficult times for the economy.

by John A. Haslem

John A. Haslem, Professor Emeritus of Finance, University of Maryland.