This afternoon, the Federal Reserve lowered the federal funds rate from 5.5% to 5.25% and dropped the federal reserve discount rate from 5.25% to 5.00%.

The fed funds rate is the interest rate that banks charge one another for overnight loans of excess reserves on deposit with the Federal Reserve system. The discount rate is the interest rate charged by the Federal Reserve on loans to member banks.

In announcing the cuts, the Fed stated: "Moderating economic expansion in recent months has reduced potential inflationary pressures going forward. With price and cost trends already subdued, a slight easing of monetary policy is consistent with contained inflation and sustainable growth."

Following the Fed announcement, major banks lowered their prime lending rate from 8.5% to 8.25%. The prime rate is the interest rate charged by banks to their most creditworthy customers.

The financial markets did most of their rate-cut celebrating yesterday. At the end of the day today, the 30-year T-bond was only up 4/32. Upon hearing the Fed's announcement, stock market participants erased a mid-afternoon 30-point deficit on the DJIA and tacked on another 14.09 points to set yet another new record high.

The Labor Department's Bureau of Labor Statistics reported this morning that the Producer Price Index for Finished Goods rose 0.5% during December.

The finished goods PPI is a measure of the selling price of goods when they are first ready for sale to the ultimate consumer. It includes prices received by the manufacturing, mining, agriculture, forestry, fishing, natural gas and electrical power industrial sectors.

At first glance, the PPI jump in December could raise concerns about inflation. But, most of the jump was due to unusually severe cold weather and an accompanying jump in prices for energy products. The December PPI for finished energy goods rose 3.3%. Residential natural gas prices turned up in December after declining in November. Home heating oil prices surged to an 11% increase for the month. Gasoline prices also increased in December, jumping 11.8%.

Month-to-month changes in energy prices and food prices can sometimes be dramatic. So, it has become common practice to subtract the contributions of these components to obtain a better idea of the underlying "core" rate of change of the PPI. For December, when the energy and food components are subtracted, the month-to-month change falls to 0.1%.

Over the course of a year, the month-to-month glitches in energy and food prices tend to average out. So, the 12-month change in the PPI for all finished goods provides a useful indicator of the status of price changes at the producer level. For the 12-month period ending in December the finished goods PPI rose 2.2%.

Meanwhile, in the Midwest, the Chicago Purchasing Managers Association released the results of its January member survey. Today's report pegged the January value of the Chicago Purchasing Managers' Index of Economic Activity at 50.9.

Last month the Chicago group reported that the Index jumped from 49.9 to 57.6 between November and December. I thought this was unusual at the time and commented: "These results were rather surprising in light of the preponderance of other data indicating a general slowing of activity in the manufacturing sector." Well, between last month and this month the number for December was revised downward to 54.8; and, as reported above, the January number is estimated to be 50.9. So, the current number is almost all the way back down to the November level. A reading of 50.9 indicates that survey respondents felt, on balance, that growth in manufacturing activity in the Chicago area was just slightly better than at a standstill.

Tomorrow, the National Association of Purchasing Management is scheduled to release the results of its nationwide member survey for January. This will provide a more comprehensive picture of the status of the manufacturing sector of the economy.

Byline: Lafferty (MF Merlin)