Prague Twin

Tuesday, August 08, 2006

Fed Decision

The Fed decided to leave the overnight lending rate at 5.25% thus ending a record streak of 17 strait rate hikes from 1% to 5.25%. One of the five voting members, Richmond Federal Bank President Jeffery Lacker, voted for another rate hike citing inflation worries.

Some of the key language in the Fed statement centered around the belief that inflation pressures should moderate over time. This is an indication that economy is slowing and that previous hikes will have a long term effect going forward. The Fed mentioned that the economy is slowing and that there are still inflation risks in the market.

Equities rallied briefly on the news, but finished down for the day. It should be a steady sell off for the rest of the week. The Feds comments about a slowing economy spooked the market a bit. I can't imagine that the Dow will break 11,300 anytime in the near future, and we are likely to see a test of the 10,650 bottom within a couple of weeks.

The dollar initially lost ground on the news but made up it's losses quickly. Long term outlook for the dollar is still bearish, but any dollar selling rally has been quickly capped.




10 Comments:

  • So the Fed caved under pressure? I hpe they know what they are doing, apart from justifying.

    By Blogger Cartledge, at 3:05 AM  

  • I stopped by to have you explain if this is a good,bad or paranoid move by the feds..

    By Blogger dusty, at 4:51 AM  

  • Essentially, the Fed's concerners about a slowing economy in this case outweighed its concerns about inflation.

    It was probably a good move considering what happened. The markets took the news largely in stride, so if they had raised, it would have been a disaster for equities.

    The markets breathed a sigh of relief, but the stark realities of the situation are becoming clearer all the time.

    By Blogger Praguetwin, at 9:15 AM  

  • What did you think of the productivity numbers, pt? It sounds like real wages for middle class workers are actually starting to increase, so I assume the corporations and the Fed will want to put the kibbosh on that trend as soon as possible. We wouldn't want workers to actually share in the wealth of the economy without having to work more or harder for it, would we? Unlike, say, some of these CEO's on Forbes' "Worst performing CEO" list who see their pay and compensation rise every year no matter how their companies perform.

    By Blogger reality-based educator, at 3:37 PM  

  • RBE,

    Your fears are paranoid and groundless. Filled up your car at the pump lately? Looked at the price of every good or service in any way related to transportation.

    Real wages for everyone except the uber rich are not increasing. Any increases at best make up for the increased price of fuel.

    PT, correct me if I am wrong, but isn't the double bind what we need to fear? The economy is slowing in part b/c the price of fuel is going through the roof thanks to instabilty in the Mideast and other oil producing areas like Nigeria and thanks to the manipulation of market forces by the oil industry oligarchs. At the same time, inflation is rearing it's ugly head as the price of everything, all goods and services, is increasing b/c the price of fuel is going through the roof. "Holy Bernanke, Batman! What does the Fed do now?"

    Am I being too simplistic here?

    Loop

    By Anonymous The Lopp Garoo Kid, at 6:47 PM  

  • Im going to answer in unison.

    When the price of labor goes up, that is usually a latter sign of inflation. Eventually, companies have to pay their employees for incresed costs of living. They try not to, but sooner or later, it happens.

    Cutting from the very top does little for these huge corporations. One of the reasons they get away with these salaries is that as a percentage of profits, they actually make less than say a small business owner or manager.

    The real cost is in unit-labor, and when that starts to go up quickly, look out.

    Yes, the Fed is in a bind. The economy got hot, oil prices went up, they tried to put a cap on it, but the market has continued to overextend itself and the corporates have banked most of their profits.

    Now comes the squeeze. Corporates are investing less. They've earned well but they know it is over now. They will cut back and the slowdown will be catastrophic for the working man. Of course, on the upswing, the working man didn't get jack, but he will pay the price when it comes down.

    The rise in wages is just a failed attempt to meet cost of living increases. The knock-on effect of oil is really going to start showing it's ugly head soon, and there isn't a damn thing the Fed can do to stop it.

    By Blogger Praguetwin, at 8:10 PM  

  • Hmmmmmmmmmm.

    I'm afraid, that's what I thought.

    Did you know you can zero % financing on a Hummer now?

    Did you know that Paris Hilton advised the British edition of GQ that she recenttly was paid $1,000,000 to show up at an event in Austria and wave at the crowds. The good news is she has decided not have sex for a year.

    OK. Let's see. We have war and sectarian violence in Iraq; we have war and the complete destruction of infrastructure in Lebanon; we have energy prices rising through the roof; genocide in Darfur; global warming as evidenced by a Florida manatee frolicking in the Hudson River just north of NYC; New Orleans and much of the Gulf Coast is still a mess; aspen forests dying in Colorado; avian flu; AIDS in Africa, and everywhere else; nutters running Iran and North Korea; and Osama bin Laden still alive and well in East Webfootistan.

    On the plus side W has shortened his vacation in Crawford; Paris Hilton is getting between half a mil and a mil to show up at events; and you can buy a Hummer w/ zero % financing.

    God's in in heaven, all's right with the world or do I need to start reading the Book of Revelations because the number of the beast is really important to determine who I draft in my fantasy football league?

    Loop

    By Anonymous The Loop Garoo Kid, at 12:27 AM  

  • In answer to your questions... no, and no.

    I did hear about Paris Hilton not having sex for a year though. There goes her social life.

    Did you know that the Bush administration made a change in the tax code that allowed businesses to write off the entire amount of a vehicle purchased in the first year (instead of having to depreciate it over 5). One catch, the vehicle had to weigh over 3 tons (or something like that; I'm too lazy to look it up right now). Essentially, if you bought a little pickup, you had to depriciate it like normal, but if you bought a Hummer, you got a fantastic tax break. How is that for conservation!!!

    I know people who bought the huge full-size pickups instead of a small truck (that would be more appropriate for their business) for just that reason.

    Can you name this picture?

    "The worlds commin' to an end, Mal."

    By Blogger Praguetwin, at 9:50 AM  

  • Natural Born Killers

    Loop

    By Anonymous The Loop Garoo Kid, at 7:23 PM  

  • ;)

    By Blogger Praguetwin, at 7:53 PM  

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