Fed's Quarter-Point Cut May Not Be the Last

Adding another complication to the central bank's predicament, Fed governors Richard Fisher and Charles Plosser abstained from the majority's decision once again, preferring no reductions to the fed funds rate target. Minutes from the Fed's March meeting, in which the committee lowered its rate target by 75 basis points, revealed that both men shared concerns about rising inflation expectations.

Many market-watchers concluded in recent weeks that the Fed would halt its monetary easing campaign after the April meeting as food and energy prices have soared around the world. The central bank's latest policy statement removed a previous reference to downside growth risks, but it also reiterated the Fed's expectations for inflationary forces to moderate.

"Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months," the Fed's statement said. "The committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."

K. Daniel Libby, senior portfolio manager with Sands Brothers Select Access Management Fund, says the Fed's actions are driving food, energy and commodity pressures higher, but he sees no evidence that the pricing pressure is being passed through to the labor market, which would signal the potential for an inflationary spiral.

"This language doesn't show any hint that this is a precursor to a pause," says Libby. "Additional cuts to interest rates will be needed. The declines in home prices will be a tremendous burden for the economy, and it will likely suffer under that burden for the next year or so."

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