Sunday, September 30, 2007

Fed futures are rather cloudy

For the time being, I'll hold off from offering any more forecasts of Federal Reserve interest rate action until it becomes more clear what principles and criteria the Fed is being guided by. Before the middle of August everything was clear, but now the Fed has headed off into uncharted territory and left us with no guidance as to how they will respond to developments in the real economy and financial markets.

Meanwhile, the good news is that despite ongoing weakness in the housing sector, not only is non-residential construction spending continuing to rise, but overall construction spending (including housing) continues to rise. And consumer income and spending continues to rise as well.

I predict that six months from now (March or April) the Fed will be defending itself against accusations that it overreated in August and September. Although pumping liquidity into the financial system was the right thing to do, the lowering of the discount rate back in August was simply not necessary and merely exacerbated the panic mentality.

I suspect that the economy will have picked up enough steam in September that the Fed will not feel obligated to cut rates any further at the october FOMC meeting. Ditto in October and November.

-- Jack Krupansky

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