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Just What Was In Those Fed Minutes Anyway?
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: May 30th, 2008 at 4:50 pm EST
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Tuesday’s market slump was the result of many excuses: new highs in oil, overbought condition, inflation data and the release of minutes from the Fed’s last meeting. We’ve said many times, any excuse for selling will work…while buyers only need ONE reason. But let’s drill down a bit into those Fed minutes and see what they were really thinking, and if it was truly the reason for the market collapse.
Like Clockwork, the Market gets Roasted
The Fed minutes were released at 2:00 EST, and while the market was weak at the time, the selling persisted and picked up the pace until the final bell. Right after the news hit the market imploded and hit the skids, but managed a very tepid recovery to end the day. So, what got the market in an uproar? It appears some carefully worded language may have spelled out no more rate cuts. If this is true, is the economy really in trouble? For months, the market has reacted to the Fed like a crack addict…needing more and more cuts for the latest fix. And yes, the Fed has been the accomodating drug dealer…for better or worse. But with all due respect to the limbo, we must ask: ‘how low can you go’? Given the historic low rate of 2% on the Fed Funds, there is hardly more room to go lower. In fact, the bond market is saying ENOUGH already. The yield curve is normalized now and taking shape, forecasting moderate economic growth with moderate inflation. That’s right!
Bernanke-Speak
The Chairman has a way with words. While acknowledging the challenge of rising inflation, he still indicates growth, or lack thereof is the major concern. The committee also believe the housing issue may be worse than expected, and while the TAF and other remedies may help somewhat, the credit crisis is far from over. So, maybe the Fed is NOT considering more rate cuts….that’s fine, perfect with our futures expectations. However, the question to ask is when they will consider raising the funds rate. It’s this argument that I consider the most critical. Yes, the inflation situation may become dire, but the growth picture is most important to the Fed, and the lack of trend growth could keep rates down for awhile. What will bring rates up? A couple of quarters of 3-4% growth would do it, and that may not occur until 2009. Bottom line, the Fed is backed into a corner, and for better or worse…rates will likely not move much until the economic needle goes positive
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Bob Lang, Economics, Investing, Oil, Psychology, Stock Market
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