driving the euro to a record high.
It may also be good for developing countries struggling to pay for increasingly expensive food and fuel, and for rich nations worried about inflation eroding economic growth.
The U.S. central bank is set to announce its next move Wednesday and financial markets still expect a small cut, but the case for standing pat is picking up proponents.
First, there are the Fed officials who argue that lowering the target for overnight rates is not effectively reaching the consumer as other borrowing costs remain high, and who worry further reductions risk stoking already hot inflation. At the Fed's last meeting in March, two of the 10 voting members on the rate-setting committee opposed the three-quarter percentage point cut, preferring less aggressive action.
Then there are the economists who see a direct link between the Fed's sharp moves and the explosive commodity price gains since January.
Now, even investors are beginning to say enough, arguing that consumers may be better off if rates go no lower.
"As central banks pump in liquidity to help bail out the financials, the result so far seems to be ever higher commodity prices," said Andrew Lapthorne, an analyst with Societe Generale in London.
POTATOES AND BONDS
James Hamilton, an economics professor at the University of California, San Diego, thinks the Fed is largely responsible for a recent spike in commodity prices. Since Jan. 22, when the Fed announced a surprise rate cut, the Reuters-Jefferies CRB index of commodities is up 18 percent.
His argument is that by late January the Fed has pushed real interest rates -- calculated by subtracting out inflation -- into negative territory, sending a signal to investors to buy commodities.
Why? Hamilton explains it with potatoes. Imagine you could buy a potato for $1, or invest that same dollar in a one-year inflation-protected bond. With real interest rates negative, that bond would be worth less in a year, but the potato would be worth the same amount.
His view is not universally held. Fed officials privately say plain old supply and demand are responsible for soaring commodity prices, although they concede a falling dollar has exacerbated the moves.
U.S. Treasury Secretary Henry Paulson said propping up the dollar would do little to ease commodity price pressures.
"Fuel prices have increased significantly ... in all currencies," Paulson told Reuters last week. "It's related to demand, continued strong demand out of developing countries. It's related to tight supply. This is a problem that doesn't lend itself to short-term solutions."
Hamilton agrees that fundamentals are at work, but says that does not explain why commodity prices have soared since January, while the global economy has actually weakened and supply has not changed significantly.
"We're talking about some new factors that are kicking in that aren't part of the overall boom that we're seeing in commodities," he said.
'MORE HARM THAN GOOD'
Wall Street began clamoring for deep rate cuts last summer, when credit market turmoil first spiked, but they have begun to change their tune in recent days.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said another cut "could do more harm than good" for consumers, who are the lifeblood of the U.S. economy. While the Fed has lowered rates by a full 3 percentage points since mid-September, borrowing costs have not fallen nearly as much.
At the same time, rising costs for food and fuel have cut deeply into consumer spending.
"Acknowledging the linkage between the (overnight) fed funds rate and the U.S. dollar, continued Fed easing has the potential to accelerate the growth in inflation and tighten the credit market," Ablin said.
"A Federal Reserve that stands pat at (Wednesday's) meeting could actually be welcomed by investors," he said.