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Double Edged
Sword
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.
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