Fed Should Slow Rate Cuts to Bolster GDP

The inflation news on Friday was good. Inflation is a lagging indicator and the news was indicative of that. But with oil still climbing, expect worse CPI readings next month. The inflation news, however, gives the Fed room to cut rates as much as they want this week. I hope they limit the cut (they have to cut, the market demands something), but we need to get onto the balcony and look around with a calm head.

Some of the news last week was actually encouraging. Unemployment claims ticked down and still register sluggish growth. M2 is up $200 billion in the last seven weeks and is growing at a 12% annual pace, which will before long wind up being employed positively; the trade numbers look like exports will contribute a positive 0.5% or so to first-quarter GDP; and inventories were up and will likely register a +0.5% addition to GDP. All of this can go away, but best guess is that first-quarter GDP will be positive.

If you read any paper at all, you see "RECESSION" screaming from every headline. The Wall Street Journal took a poll that showed that more than 70% of economists believe we are in a recession now. The Financial Times and Friday's WSJ ran articles that said, essentially, recession is unavoidable. Business Week had a cover story about "Waking Up To Recession." And, lastly, I noted last week that the business school at Duke surveyed a group of execs, 80% of whom said we are in or will soon be in a recession. Enough! Could it be that we should start to look the other way?

My fear is that the rate of inflation will tick up with continued rate cuts and that the aftermath of this down cycle will be more difficult than it has to be. Unemployment in the eurozone is 7.2% and the dollar weakness is hurting their export industries, which are a bigger piece of the pie than the 15% or so they are of U.S. GDP. Sooner or later the European Central Bank will have to cut rates, and if we would only come out for a strong dollar and temper the rate cuts, the dollar would rally and oil would fall, which would be a benefit to our economy far greater than the benefit a weak dollar gives to our exports. 70% of our GDP is consumer-driven, and lower oil prices would be a boon.

Also, we haven't yet failed Art Cashin's pass/fail market test. Even with Friday's debacle, the averages are above the lows set in January. The S&P closed at 1288 (Jan. intraday low was 1271), and the Dow at 11,951 (vs its Jan. intraday low of about 11,600.) That might be very slim and could go away in a heartbeat come today's trading, but it gave me a break for at least the weekend.

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Vincent Farrell Jr. is a principal of Scotsman Capital Management. Prior to joining Scotsman in April 2005, Farrell was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships. He is a regular guest on CNBC as well as other national print and broadcast media.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.