feds watch trading, page-32

First part of an article on Bloomberg. Argues that 0.5% cut not a certainty at all.....

Price Measure Says Rate Can't Fall as Traders Expect (Update1)

By Liz Capo McCormick and Sandra Hernandez

Dec. 10 (Bloomberg) -- The key to whether the Federal Reserve continues to cut interest rates after this week may hang on the wall behind economist Brian Sack's desk in Washington.

Sack, head of monetary and financial market analysis at the Fed in 2003 and 2004, uses a chart that plots forward rates measuring investor expectations for inflation in five years. The gauge is so accurate that Sack and his colleagues persuaded the central bank to use it to help set policy. The chart is autographed by former Fed Chairman Alan Greenspan.

Right now, it shows current Fed Chairman Ben S. Bernanke may have less room to lower borrowing costs than investors in Treasuries anticipate, potentially setting bondholders up for a fall. The expected inflation rate, which Sack says replicates what Fed officials use, reached 2.91 percent last week, the highest since 2004, when the central bank began the first of an unprecedented 17 rate increases. The measure was at 2.79 percent on Nov. 1.

``One of the defining features of the Bernanke Fed to date is its emphasis on measures of longer-term inflation expectations,'' said Sack, whose partners at Macroeconomic Advisors include former Fed Governor Laurence Meyer. ``The Fed is willing to tolerate short-run movements in inflation, but only as long as those movements don't appear to be dislodging long-run inflation expectations.''