Is Everything Really Getting More Expensive, Or Is It Just Clever Manipulation?

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Looks like we’ve found the perfect brew to give Wall Street bulls a bad case of nausea: Take $133-a-barrel oil and salt in a strong reminder that the Federal Reserve really wants to be finished with interest-rate cuts.

Stocks were doing badly enough for a second straight session today as oil continued to spike. But the bottom fell out about 11 a.m. PDT, after the Fed released the minutes of its April 29-30 meeting.

The quarter-point cut in the Fed’s key rate at that meeting (to 2%) was termed ‘a close call’ in the minutes, which in turn ‘reinforces the sense that policy is on hold now,’ said Marc Chandler, currency strategist at Brown Bros. Harriman in New York.

Maybe investors already had figured as much, but it still was no help on a day like today, as oil surged again. The Dow Jones industrial average lost 227.49 points, or 1.8%, to 12,601.19. That brings the two-day decline to 3.3%, and trims the Dow’s advance from its March low to 7.3%.

Although the minutes showed the Fed remained concerned about the struggling economy, policymakers also revised up their 2008 inflation forecast to a range of 3.1% to 3.4%, a full percentage point higher on both ends versus their January forecast. And with oil already up $20 a barrel since April 30, the Fed is likely to be more worried about inflation now than it was then.

If, because of inflation fears, the Fed can’t or won’t ease credit further to help the economy, that removes a key element of support for the stock market’s rebound. ‘Now you’ve got some concern there,’ said Dan McMahon, head trader at Raymond James & Associates.

And if short-term interest rates aren’t going lower, that doesn’t help the picture for the bond market, either. Unlike most days when stocks sell off, investors didn’t rush into Treasury securities today; instead, they sold them, too. The two-year T-note yield jumped to 2.41% from 2.31% on Tuesday.

Oh yeah -- and that spring rebound in the dollar? May have to cancel that idea, with stocks and bonds both under heavy selling pressure. The euro surged to $1.579 today, the highest since April 23 and up from $1.567 on Tuesday.

When it rains, it pours.