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News You Can Use 8/29/00
Decimalization
Investors have watched from the sidelines to see what the Fed
would do on interest rates. The Fed's foremost desire is for an
economy that has only the smallest amount of inflation and only
a mild rate of growth. The Fed tries to make this happen by watching
the different economic road signs along the way and adjusts interest
rates as they see fit. If the Fed feels we are going too slow
they press on the gas by lowering interest rates and if we're
going too fast, like we have been for the better part of a year,
the Fed tries to slow things down a bit by raising interest rates.
The Fed wants to give us the best possible ride. They have done
a splendid job over the past handful of years, and they are likely
going to continue that success. We have seen the results of their
handy work as one economic report after another shows signs of
a slower economy. There is little doubt the Fed would rather keep
the economy running slightly faster than too slow. The Fed has
a targeted rate of growth for the economy that neither creates
inflationary pressures nor causes unemployment and too sluggish
spending. Slowing the economy, even slightly is a double-edged
sword. A reprieve from higher interest rate hikes is great.
The other side of the sword that might cut us will appear around
Thanksgiving as companies' report their financial results for
the quarter ended September 30. As the economy has shown signs
of a slowdown so will corporate profits. And when slower Q3 2000
earnings are compared to robust Q3 1999 earnings investors will
need to keep in mind that this has happened because we want sustained
growth. Investors haven't been very merciful to less than stellar
earnings reports recently and they will need to soften their attitudes
and expectations, or they might just cause their own train to
derail.
The one factor the Fed will need to keep
an eye on is the cost of crude oil. Oil is at a 10 year high
and even if the OPEC countries open the spigots a little more
over the next couple of months, refinery capacity may not be able
to ramp up quickly enough to keep demand from dramatically running
up the price of gasoline and home heating oil. These higher
fuel costs will spill over to every corner of the economy. The
Fed has hopefully factored this into their decisions. If the economy
slows too much we could possibly even see an interest rate reduction
late in the year or very early next year.
QUOTE:
"What
counts in any system is the intelligence, self-control, conscience
and energy of the individual." - Cyrus Eaton
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