It is getting harder for the Fed.

To cut or not to cut, that is the question. Well, that question just got a lot harder for the Fed. The extended interest rate hike has not yet killed off inflationary pressures in the US economy. According to the Labor Department, producer prices increased by 1.3 percent in February compared to the previous month. Food prices were up almost 2 percent, while energy prices increased 3.5 percent.

Overall, the Fed finds itself in a bad place. As today’s data suggests, inflationary pressures remain strong, necessitating continued high interest rates. On the other hand, the housing prices are falling, foreclosure rates are accelerating while subprime lenders are falling like flies. The housing market needs an interest rate cut real bad.

In the past, the maxim has been “central banks should target inflation and not asset prices”. In practice, the Fed was happy to let asset prices – such as stocks and housing - bubble into the stratosphere. However, it has always been more uncomfortable with declining asset prices. When the dot.com bubble threatened to bring on a recession, the Fed hastily cut interest rates. Unfortunately, today the inflationary environment is much less benign than in 2001. Any attempt to rescue the housing market will only serve to maintain the already elevated levels of inflation.