Wednesday, March 21, 2007

Fed on hold....and Yield Monkees Rejoice...

The FOMC maintained its Fed Funds target at 5.25% as was widely expected. The policy outlook statement was slightly changed, replacing the reference to "any additional firming that may be needed" with a neutral "future policy adjustment". The vote to hold rates steady was unanimous.

The markets really liked this news allowing stocks and bonds to rally on the anticipation of a rate decrease in the future. Bill Gross who runs the Pimco bond fund was on CNBC pointing out that the last time the Fed shifted from a tightening to a neutral bias was December of 2000. At the next meeting, one month later, the Fed cut rates. So the time could be near, very near. The "fly in the ointment" is inflation. The Fed stated that they expect inflation pressures to subside, but would be watching this very closely. They also stated that they expected the economy would grow at a moderate pace. HHmmm...well maybe, but I think moderate may be over stating it. This economy, in my mind has certainly slowed down and although I expect a soft landing I am not nearly as optimistic as the Fed. I again go back to my simple economic research to prove my point. Walking from my office to Grand central station I see numerous (and many more) empty store fronts (even the one under Trump tower).If store fronts are empty then rent is not getting paid. In addition during the winter months I rent out a batting cage (for 30 min)weekly for my youngest son. Last year it was a struggle to get a time. Every week the place was jammed full of teams and players practicing. This year the staff is greatly reduced and the time slots are readily available. This may be simple analysis but remember it is the likes of you and me which drives an economy.

As I said the markets liked this news. Emerging Markets faired particuarly well. If rates are falling Yield Monkee's (like myself) will be looking for better returns. Also remember that Mexico has been on the verge of raising rates (this Friday is their announcement), after this I see no way that it happens. As such the front end of the curve came off very very hard this afternoon.

I expect more of the same going forward. I think the direction has been set. Lower rates in the States. Well I hope so at least.

Good Luck and Good Forex Trading.




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