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Thoughts on Fed Decision - Weekly Market Summary
posted 04.28.2008 at 5:00 p.m. by steve
The week ended April 25 was another marginally positive one for stocks as the yield on the 2-year treasury surpassed the Fed Funds rate (click here for details). Barring some crazy final days to the month of April, equity markets will see their first positive performance calendar month since October. We are certain that there are still many worries on investor minds, and many may be unaware that the market has done so well since the collapse of Bear Stearns around March 17. It definitely always seems that the media hones in on the negative news, and gives better news so little attention.
Moving into Wednesday, the Federal Reserve is largely expected by the market to ease an additional 25 basis points. There have been some murmurs of a no-cut decision following the meeting. Such a result is difficult to predict as it relates to how the stock market would react. At the moment, in the face of a weak dollar and oil’s seemingly endless price ascent, we are inclined to slightly favor no-cut. Such an action, while possibly surprising to the markets, may actually be a rally point in the ensuing days. No cut to the fed funds rate would likely mean that the dollar strengthens notably against other currencies such as the euro, and might be the catalyst that could put a ceiling on oil’s climb, and actually sends it and many other dollar-denominated commodities into a tailspin. A stronger dollar should mean cheaper oil and food for Americans! Additionally it would help ease inflation, and even help the European central bank build the case that it should begin easing (further assisting the dollar and easing inflation globally). That would indeed be welcome by consumers, especially as the Government stimulus checks have begun to flow into individual’s bank accounts. Surely such activity will enhance the economy and stoke some consumer confidence and spending, even if the checks do nothing but go to help the average person’s financial balance sheet by paying off some credit card debt.
It is often said that government economic stimulus is like pushing on a string; it takes a while for the effects to be seen. We hope that whatever the result of tomorrow’s fed meeting might be, that the accompanying statement is foretelling of a stabilizing dollar and commodity prices. That would really help stocks in a number of ways.