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Jan 29, 2004 Today the Federal Reserve caught the markets by surprise with a slight change in attitude concerning potential increases in the key policy rate. The rate has been stuck at 1 percent for quite some time and indeed the Fed left the rate at 1 percent. However, the language that the Fed uses to convey potential future action has taken on increasing importance, ever since the session when Alan Greenspan coined the term irrational exuberance. At the meeting on Wednesday, the Fed dropped a phrase that it had been including in its statements about its intentions. The Fed has indicated that it will keep interest rates low for a “considerable period” due to the potential for deflation weighing as heavy as inflation. Today the Fed dropped that statement, and that rattled the markets. The Dow lost 141 points, the Nasdaq dropped 38 points, and the S & P 500 dropped 15 points to finish below 1130. The Fed has been as concerned about prospects of deflation as well as inflation. However, the economy is picking up steam and the Fed obviously believes that the chance of deflation is diminishing to a point where the primary concern now becomes inflation. Indeed, the Wall Street Journal today carried an article titled pithily “Inflation rears its head. . . if only on new bond issues.” The Fed has deep concerns about inflation and is moving to get into position to act if it has to. The Street.com notes that the Fed has moved away from holding the markets’ hand, which it has essentially done for the past year as the markets struggle to regain their feet from the recession. The Fed has been largely successful and today’s action, although not seen as soothing to the market, is actually a good move that will turn out to be smoothing to the market. That is, today’s action can help prolong the bull run the markets have been enjoying for the past year. By taking some of the slack out of the action, the Fed’s action today acts as a gradual break. This will prevent a huge and sudden break in the future, which will be nasty for the market. Today’s Fed action should actually keep the bull market running in the near term. Also of consideration is the fact that this is an election year, and most financiers, economists and political pundits don’t see the Fed actually doing anything of a significant nature until after the elections are well over. The Fed apparently doesn’t want to be a factor in the election. Today’s the Fed administered a little medicine to the market, but if inflation doesn’t rapidly appear, the medicine should work to keep the markets moving ahead at a sensible pace and prevent a huge bubble from forming that will again damage the economy and bring the recovery to a bursting halt. ------------ About the author: Dwayne Hines currently has 12 books selling in major bookstores and writes for major magazines such as Physical and FitnessRX. Email Dwayne Hines: dhines@3dinet.com Comment on this column in the forum. Tell a friend about this site! ------------ |
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