[jyl]

The Fed is seeing the economy continuing to deteriorate, including serious pressure on consumer solvency and spending, financial institutions solvency, and credit markets. I think what they are seeing is worse than what the mainstream media is reporting. It appears that, in the Fed's judgment, the risk to the economy is serious enough that they are willing to keep lowering rates despite the risk to inflation.

The Fed also believes, I think, that the risk to inflation is more to wholesale prices (PPI) than to consumer prices (CPI), and thus more to corporate margins than to consumer spending. Whether that is right, I don't know. I do know that PPI is not a great predictor of CPI, if you do a simple regression over the past 30 years. There is a directional relationship but big moves in the PPI produce no moves or small moves in the CPI.