The Federal Open Market Committee issued its decision to leave interest rates at 2%. This was as expected. However, the statement was much more dovish than expected. Language in the previous statement indicating that downside risks to growth "appear to have diminished somewhat" was deleted, and the focus clearly remained on the economic situation, although inflation risks continue to be acknowledged.
The U.S. equity markets rallied prior to the statement being released and continued after the decision was issued. Oil prices also continued their retreat.
The dovish nature of the decision was indicated by the fact that there was only one member voting for an increase. As many as three members were expected to vote for an increase. Despite the recent hawkish statements, all members voted to maintain the 2% level.
This confirms what I have said in recent posts that hawkish talk does not necessarily translate into hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."
The economy is still far too weak for the Fed to begin raising rates.
The Federal Open Market Committee issued its decision on interest rates Wednesday. It kept rates unchanged as expected but increased the hawkishness of the accompanying statement. It maintained its credentials on combating inflation but was careful not to cause any trauma to the financial markets that would require reversing this position. If this were to occur, the Fed would lose credibility.
The Fed wants to maintain its credentials on inflation control. This is necessary for it to protect the dollar from an uncontrolled spiral downward and an increase in core inflation. However, there is very little that the Fed can do to limit total inflation in the short term. The current inflation is really being primarily driven by the rise in oil prices. This is being caused primarily by the increase in demand in emerging markets, such as China and India. Fed policy has little effect on this. Oil prices rose throughout the last Fed tightening cycle despite the rise in the yield on short-term Treasury Bills.
Oil actually began its rise as the Fed began to increase interest rates in 2004. Prices doubled as the Fed substantially tightened monetary policy. Europe also has some of the same inflation issues that we face despite the refusal of the European Central Bank (ECB) to lower rates.
The Federal Open Market Committee (FOMC) will announce its decision on interest rates on Wednesday at the end of a two-day meeting -- one that will be watched more closely than ever before. The financial markets have experienced incredible volatility over the last several months, almost disintegrating on several occasions. However, the Fed's string of interest rate cuts has managed to stabilize the situation, at least temporarily. Whether the market remains stable depends in good part on the Fed's next actions.
There is a general consensus, which I agree with, that the FOMC will cut both the short-term rates it controls -- the Fed Funds Rate and the Discount Rate -- by 0.25% and then indicate that it will pause in taking any further action at its next meeting. Given this consensus, the supporting statements the Fed issues will be what are truly important to investors. The devil, in this case, really is in the details.
In the past, the Bernanke Fed had a serious perception problem. Many investors thought that it was behind the curve, unable to stop a meltdown of the financial markets and a severe recession. The recent rate cuts and injection of liquidity through various lending facilities, along with facilitating the Bear Stearns sale, have eased the situation. Bernanke must be careful not to damage this newly found credibility in the upcoming FOMC statement.
PDUFA date for Genentech, Inc. (NYSE: DNA) and Roche Holding Ltd. (OTC: RHHBY)'s supplemental Biologics License Application for Herceptin for label expansion to include AC followed by docetaxel in treatment of adjuvant HER2+ breast cancer.
PDUFA date for Shire plc (NASDAQ: SHPGY) and New River Pharma's supplemental New Drug Application for Vyvanse (NRP-104) treatment of Attention Deficit Hyperactivity Disordre, or ADHD, in adult patients 18-55 years old; the drug is already approved for pediatric ADHD ages 6-12.
Verizon Communications Inc. (NYSE: VZ) to report Q earnings; conference call at 8:30am.
Tyson Foods, Inc. (NYSE: TSN) to report Q2 earnings; conference call at 9:00am.
Tuesday, April 29
Two-day FOMC meeting beginning at 8:30am.
PDUFA date for Merck & Co., Inc. (NYSE: MRK)'s New Drug Application for Cordaptive (MK-0524A) adjunctive therapy to diet for treating elevated LDL Cholesterol, low HDL Cholesterol and elevated triglycerides levels.
PDUFA date for Sucampo Pharmaceuticals, Inc. (NASDAQ: SCMP)'s supplemental New Drug Application for dose of 8mg treatment of Irritable Bowel Syndrome with Constipation; already approved for Chronic Idiopathic Constipation at 24ug dosage.
BP plc (NYSE: BP) to report Q1 earnings; conference call at 10:15am.
United States Steel Company (NYSE: X) to report Q1 earnings; conference call at 2:00pm.
If you wanted to look for the blame-game on why stocks listed lower most of the day, you could blame pending home sales at lows, higher oil prices, and even the FOMC minutes hinting at recession without saying "recession." We also saw the White House say it couldn't endorse the current structure of the proposed housing bill.
The truth is, Wall Street and Main Street are also coming to grips with the fact that we are about to get earnings (and guidance) from companies that we can only hope is mixed. Otherwise we just have to hope for "less-bad" news. Get ready for the legacy airline sector's low P/E and low Price to Book values to disappear completely. Below are the unofficial closing bell index prices:
Advanced Micro Devices (NYSE: AMD) saw shares fall almost 5% to $6.03 after it issued an earnings and revenue warning on Monday after the close. Had it not announced a major layoff plan, this would have been far worse. So much for this "growth story."
PDUFA date for Bristol-Myers Squibb Co. (NYSE: BMY)'s supplemental Biologics License Application for Orencia for the treatment of Juvenile Rheumatoid Arthritis.
Alcoa Inc. (NYSE: AA) to report Q1 earnings; conference call at 5pm.
Tuesday, April 8
Chattem Inc. (NASDAQ: CHTT) to report Q1 earnings; conference call at 9:00am.
FOMC to release minutes of the March 18th meeting at 2:00pm.
The stock market finished strongly today. Some of it was attributed to positive news about the municipal bond insurers. However, I believe much of it was due to the belief that the Fed will continue cutting rates as necessary to cushion the slowdown or a potential recession.
Prior to the recent FOMC statement and the inter-meeting rate cut, the Fed was sending out mixed signals regarding rate cuts. It tried to establish its credentials as an inflation hawk; however, it also left uncertainty about its ability to deal with a recession. This reduced the effectiveness of the initial rate cuts. Many believe that the Fed would be caught behind the curve in dealing with a potential recession.
The combined decrease in the Federal Funds Rate of 1.25% in the last two weeks along with the accompanying FOMC statement has established the Bernanke Fed's credentials for dealing with a potential recession. It has replaced the current market confusion with confidence in the Fed.
The Federal Open Markets Committee (FOMC) made an intra-meeting announcement cutting the Federal Funds Rate Target 75 basis points to 3 ½% and a similar cut in the Discount Rate to 4%. The FOMC justified the move because "broader financial markets have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
In a separate move, the Canadian Central Bank also announced a rate cut as well.
This emergency move was made ahead of a FOMC meeting next week and after global markets around the world tumbled during the Martin Luther King Day holiday when U.S. markets were closed.
I believe that this move was made to re-establish the idea of the Fed as the lender of last result: the Bernanke Put. Initially, the Fed was reluctant to cut rates for several reasons:
It was viewed as bailing out the stock market, not the economy;
There were inflationary pressures from rising all prices;
U.S. exports largely resulting from a falling dollar seem to be cushioning any drop in the economy.
The Federal Reserve's FOMC minutes from the December meeting [pdf] released today show that softening economic growth as well as the "tightening of credit and deterioration of financial market conditions" played a major role in the Fed's decision to cut the federal funds rate by 25 basis points to 4.25%. The only vote in opposition to that cut was from Boston Fed President Eric Rosengren who "regarded the weakness in the incoming economic data and in the outlook for the economy as warranting a more aggressive policy response. In his view, the combination of a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill functioning financial markets suggested heightened risk of continued economic weakness."
The committee also indicated that there is a "need to remain exceptionally alert to economic and financial developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen."
Clearly, the conclusions from this meeting indicate the FOMC saw many risks for this country's financial future and left open the possibility of further rate cut moves by the Fed if economic growth continued to slow and financial conditions continued to deteriorate. When banks report at the end of this quarter, the Fed will likely get an eyeful as some key banks are forced to write-down even higher losses. Today's news that the manufacturing sector contracted to its weakest level since April 2003 will add fuel to the fire that further rate cuts are needed.
The Federal Open Market Committee (FOMC) reduced the target Federal Funds Rate and the Discount Rate by 0.25%. The quarter-point cut in the Fed Funds Rate was predicted, although many (myself included) expected the Fed to be much more aggressive in cutting the discount rate, reducing or possibly eliminating the discount window penalty.
The FOMC deleted the reference to a balance between inflation and economic deterioration, although it mentioned that inflationary pressures were still a concern. However, the language describing the recent economic turmoil was relatively restrained.
The Fed gave no assurance that it considers the economic deterioration more serious than inflation, stating that it "will act as needed to foster price stability and sustainable economic growth." It also gave no indications of its course for the future, saying "Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."
When the Federal Reserve cut its discount rate from 6.25% to 5.75% at an unscheduled meeting of the Federal Open Market Committee on August 17th, one ostensible but unspoken reason was credit market turbulence and worries over the health of many financial institutions.
At its next regular meeting on September 18th, Fed policymakers cut both the federal funds target rate and the discount rate by 50 basis points, to 4.75% and 5.25%, respectively, citing concerns over the economy. In the accompanying statement they wrote that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."
Then on October 31st, the central bank cut its fed funds target rate by 25 basis points to 4.50%. While they did say that "growth was solid in the third quarter, and strains in financial markets [had] eased somewhat," they noted that "the pace of economic expansion [would] likely slow in the near term, partly reflecting the intensification of the housing correction."
The Federal Reserve has lost its moorings. That's because it used to stand for keeping inflation low. In September it cut rates 50 basis points because of vague fears of a recession -- that's negative GDP growth. Today, however, the Commerce Department reports that GDP grew 3.9% in the third quarter -- the fastest in 1.5 years.
Yet the market is pricing in a 25 basis point rate cut to be announced this afternoon. As I noted earlier this week, inflation is rampant with oil hitting an all-time high and labor costs growing at a 4.9% annual rate. This inflation, coupled with the booming economy, would suggest that the Fed should raise, rather than cut, rates.
But I believe that the market is now dictating what the Fed should do and the Fed seems too intimidated by the reaction of the stock market to do its job of fighting inflation. So we can expect to listen to Treasury Secretary Hank Paulson talk about a strong dollar, even as it keeps hitting all-time lows.
A rate cut today will send that dollar even lower, making it hard for foreign investors to justify holding on to such a low-yielding currency.
The market is assuming that the Federal Reserve will cut rates by one-quarter of a percent tomorrow. Some experts, like bond guru Bill Gross, think that the cut should be deeper.
But there is some indication that the Fed may not cut at all. The Wall Street Journal argues that "for policy makers, the decision is between the quarter-point reduction and no cut at all."
If there is no cut, the market will almost certainly take it badly, even if the Fed indicates that it may move rates down later in the year. Most investors and Wall Street experts believe that lower rates could help the mortgage business and stimulate sales of goods and services such as cars.
But the Fed appears to have some ongoing concerns about stimulating the market into a period of inflation. U.S. GDP is still moving up at a crisp pace. Unemployment is low. The stock markets are near multi-year highs.
No cut by the Fed could push the stock market down for a few days, but reasonable third-quarter earnings and a solid economy are likely to mitigate that over the near-term.
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The Federal Open Market Committee (FOMC) will announce its decision on interest rates on Wednesday at the end of a two-day meeting -- one that will be watched more closely than ever before. The financial markets have experienced incredible volatility over the last several months, almost disintegrating on several occasions. However, the Fed's string of interest rate cuts has managed to stabilize the situation, at least temporarily. Whether the market remains stable depends in good part on the Fed's next actions..gif){kind=logo}
The stock market finished strongly today. Some of it was attributed to positive news about the municipal bond insurers. However, I believe much of it was due to the belief that the Fed will continue cutting rates as necessary to cushion the slowdown or a potential recession.
The Federal Reserve's 
The Federal Open Market Committee (FOMC) reduced the target Federal Funds Rate and the Discount Rate by 0.25%. The quarter-point cut in the Fed Funds Rate was predicted, although many (myself included) expected the Fed to be much more aggressive in cutting the discount rate, reducing or possibly eliminating the discount window penalty. 
When the Federal Reserve cut its discount rate from 6.25% to 5.75% at an unscheduled meeting of the Federal Open Market Committee on August 17th, one ostensible but unspoken reason was credit market turbulence and worries over the health of many financial institutions.
The Federal Reserve has lost its moorings. That's because it used to stand for keeping inflation low. In September it cut rates 50 basis points because of vague fears of a recession -- that's negative GDP growth. Today, however, the Commerce Department reports that 
The market is assuming that the Federal Reserve will cut rates by one-quarter of a percent tomorrow. Some experts, like bond guru Bill Gross, think that the cut should be deeper.
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