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.