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Strategies & Market Trends : John Pitera's Market Laboratory

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To: John Pitera who wrote (2537)	7/11/2000 12:51:41 PM
From: John Pitera	Read Replies (1) of 33421

Chart of Nominal and real Fed Funds rates geocities.com as you can we are near a 10 Year high. Hard to say if we are near an inflection point. here are some nice comments on Fed policy --------We've softened our policy outlook given the continued slowdown witnessed over the last few months. Unless the data over the coming month suggest a strong rebound we expect the FOMC to remain "on alert" but on the sidelines as far as policy adjustment is concerned. The period ahead is a tricky one for the Fed. The 175 bp of tightening to the highest real funds rate since 1989 appears to have slowed the economy without stalling it. Additional tightening may be needed through the end of the year or early 2001 but we suspect the November presidential elections may keep the FOMC on the sidelines at least until the November 15 FOMC meeting if the economy cooperates. Until then the Fed weighs the fear of the supply/demand imbalance against fairly tame core inflation and strong productivity growth which continues to steal the inflation implications from the tight labor market. The Fed has now come to the point where caution is as valued a judgement as pre-emptive tightening. The lagged economic effects from the more aggressive final steps in the tightening haven't been fully reflected in the economy yet as the slowdown hit rather suddenly rather than settling in gradually. Higher financing rates are weeding out the marginal players and have stopped the NASDAQ surge (for now) as the 6.5% policy rate stands at its highest in almost a decade. The risk of a third quarter rebound, as seen in both the last two years, is real but appears limited given the broad-based nature of the economic slowing. Longer term policy considerations still turn off the trends in unemployment and the power of the continued record-length expansion. The overall supply and demand imbalance still has the Fed's attention. Listen to Greenspan over the coming week as he provides the Fed's view of the economy, though the tone may be firm to help guard against an equity driven rebound.-----

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