Savings Experiment: Snow Removal
The Money Man Behind Rick Santorum: Who Is Foster S. Friess?The Minutes of the September 18 Federal Open Market Committee (FOMC) meeting were released today at 2 PM ET. Because of the 50 basis point reduction in the Federal Funds rate that many on Wall Street (myself included) did not expect at the time, there was more anxiety than usual surrounding the release of this report.
Yesterday, the market ended the day for most indexes on the downside, although only mildly so and on low volume because of the Monday holiday. The markets were also off slightly, prior to the release of the minutes. A rally began shortly after the release of the report. The big question is why?
On one side of the equation, the Fed gave no indication that this was only the first in a series of rate cuts. It actually appeared that the cut was more a form of insurance to "forestall" the potential effects of the housing crisis on the broader economy. This indicates that there may not be any additional rate cuts in the near future.
On the other hand, the Fed also gave indications that inflation is becoming less of a concern. Therefore, a major potential catalyst for future rate increases seems to be less of a factor. This is important given Fed Governor Don Kohn's speech last week.
The rally indicates that the positive aspects of the minutes outweigh the negative. Thus, for the moment, the glass is half full, not half empty.
My own belief, as I mentioned earlier, was that the negative employment report prior to the Fed meeting was the catalyst for the rate cut. However, this has since been revised upward. We appear to be back on a slow growth path. Therefore, there may be a decreasing chance of a future rate cut unless the economy deteriorates further.
However, given the current housing situation's drag on the economy, the Fed will not attempt to tighten in the near future. We are also going into an election year as well. This looks a lot like 1998 when the Fed cut interest rates by 75 basis points and stopped. The economy continued to grow and the equity markets rose. We will see if the future repeats the past.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com, an independent research firm focusing on investment strategies using the Federal Reserve's impact on the stock prices. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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