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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: P.Prazeres who wrote (12419)	12/28/1997 5:08:00 PM
From: bearshark	Respond to of 94695

Hi Paulo: I think one of the very difficult things for 1998 will be to predict where fed funds and the discount rate are headed. I have been focusing on the the U. S. dollar in evaluating the future course of the U. S. economy. In the past, the Fed would oblige us and change rates to affect a change in the U. S. economy. That was a simpler world. However, Asia has preempted the Fed--at least for now. So we have the value of the dollar to regulate the U. S. economy for the time being. I guessed that the strength of the dollar would reduce the U. S. growth rate more than anyone expected in 1998. In the FOMC minutes for November, it is clear the FOMC is now focusing on the strength of the dollar too. As of now, they do not see a large effect on the U. S. economy due to Asia. I would assume that the Fed has reached an agreement with the BOJ to defend the yen at a certain point--perhaps 130 yen to the U. S. dollar. That is where the BOJ intervened the last time. If that is where the valuation line is drawn, perhaps there will not be that much of an effect on the U. S. economy. Next, the FOMC members are still concerned with wage and benefit increases in the service industries. How much of an effect will there be on the U. S. service industries due to a stronger dollar? Northwest Airlines has 30 percent of its business in Asia and the strength of the dollar will have an effect on them. ( I am assuming that the airlines are considered as a part of the service industry.) But what else will be affected in the service industries? I can understand hard goods (autos, heavy equipment, chips, etc.) being affected by a stonger dollar but I am not sure about services. So I am in a bit of a quandary. If there is a significant slowdown in the U. S. economy, I agree that the FOMC may reduce rates in some manner--perhaps early in the year. However, if the service industries are not cooled down in the slowdown, then the wage and benefit increases will still be a conern for the FOMC. They had one vote already in November to raise rates. In my guess for next year, I toyed with the idea of saying that the FOMC would lower rates and then turn right around by the end of the year and raise rates. But the Fed has been quite competent, so I did not. Instead, I figured they would be forced to deal with wage inflation by the end of the year. This is just one more variable to fret over during the course of 1998.