Guidance from Greenspan?
By Peter S. Iuvara
The Federal Reserve, led by Alan Greenspan, is scheduled
to meet today to discuss their plans to help kick-start our
slumping economy. Business investments and spending have been
slowly increasing and inventories are starting to show positive
signs of reduction.
seems like everyone is expecting a 25 basis points cut this
afternoon at 2:15PM EST. The real focus of the street will
be on exactly what guidance Mr. Greenspan and the rest of
the gang have going forward. There is no doubt that the FOMC
have been closely following our economy with a watchful eye
on signals of a bottom and recovery.
The Federal Reserve has cut rates 6 consecutive times in
just about as many months. The last rate cut of 25 basis points
seemed to be largely expected, but it ceased to permanently
move the markets. It may have been the guidance, or lack thereof,
given during the announcement by the FOMC that left a bad
taste in investor's mouths. They seemed to have as little
guidance on our economy's fate as most recent CEOs have had
when asked what can be expected in their respective industries.
The real concern and importance for the Federal Reserve giving
guidance this time around is that it is crucial for companies
making the decisions on whether to begin a "wave"
of business investment spending or not. If the Fed gives guidance
that our economy is still weak, and more rate cuts may be
necessary, than companies and CEO will most likely than not
hold off on spending until the rate cuts are over. At that
time, they will be able to borrow the needed money for investments
at a cheaper rate
(and vice versa).
If the Fed cuts rates by 25 basis points this afternoon,
but gives no guidance, we should expect a market sell off
largely due to uncertainty. Interestingly enough, over the
5 trading days following the last three scheduled interest
rate meetings occurring on March 3, May 15 and June 27 the
Nasdaq traded higher 3.29%, 10.9% and 3.18% respectively.
This indicates that the markets usually get a head of steam
in the days immediately following a Federal Reserve rate cut
(incidentally, all rate cutes were in line with the streets
expectations, as will a .25% rate cut be today). The markets
although have traded lower in the days and weeks after the
initial 5-day pop.
Maybe, if the Federal Reserve gives the necessary amount
of guidance, and it is in-line with what the street wants
to hear, it may begin to start the process of instilling confidence
back into the US investor. Those investors that have the discipline
and risk tolerance to make it through this thunderstorm of
a market, and invest wisely now near market lows, should surely
benefit from that pot of gold waiting for them after the rainbow.