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Good 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.

It 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.

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