Sunday, November 4, 2007

Hello and welcome to the Federal Reserve meeting Nov 5th 2007.

As of the previous meeting October 31, we, the Federal Reserve System decided on a 25 BP cut, to allow much needed liquidity in the ailing financial markets. Though on a whole, the fundamentals did not warrant this, but was done as a pre-emptive measure.

As noted in Purpose and Functions of the Fed Reserve, or job here today will be to use Monetary Policy in pursuit of maximum employment, stable prices, and moderating long term interest rates for the assurance of the US economy’s health.

Our analyst is of a global perspective, which does not focus on either the micro or macro fundamentals as more important but both as dependent on each other. We’ll further strengthen our fundamental analyst with technicals and sentiment.

The over all structure of the presentation and each individual topic presented will include the following structure:
1. Bullish Aspects of the economy and or topic
2. A contrasting Bearish view
- saying why which side is more important
3. Tying and relating the topics to the current state of the economy
4. How we, the fed’s, should implement monetary policy according to our data.
5. Lastly, we factor in the team sentiment and current sentiment of the media, markets, and economist (as they have significant potential influence on monetary policy indirectly).

Stemming from the summer the lag affect is finally being felt from the series of holds on the Feds Funds rate, as reflected in continued poor performs in retail and recently expected slow growth in high end soft good stores. This is significant in that the mid to upper middle class has been driving consumption a GDP numbers through the housing slump. The wealth affect maybe said to be unwinding; this maybe only temporary with the volatility in the energy markets, as the weather has not fully settled, and seasonality not in trend, and weak financial conditions, which will slow consumption. With volatile food and commodity prices as also reflected in the CPI and PPI, short term inflationary pressures are greater as perceived, and will not allow us further cuts for a speedier recovery. On the positive side this will allow for the necessary restructuring of fundamentals in weak sectors of the economy, instead of poor practices being spurred on by more cuts which are better for long term recovery. As current sentiment shows, a weaker high end consumer maybe slowing down, this is only on the soft good side of retail, as if one were to look at big box there has been significant strength. Technology on a whole has been buoying the markets, instead of buying more clothe or hand bags, people won’t be driving as much but will instead spend it on new gadgets such as the iphone, or plasma TVs etc... Another thing I see is that the consumer on a whole will be resilient even with high energy prices, due to a tight labor market. The Labor markets wages as steady to increasing, which indicates people are still getting their paychecks and will still be spending, which will reflect more positively than expected in the upcoming holiday season. Adding to the inflation picture a weaker dollar may seem like a problem. But this is mitigated by the improved trade deficient. If anything a weaker dollar is more bullish for GDP. As fundamentals will point to the stronger side of the economy, the dollar will find support, and foreign bargain hunters will rally to help stabilize the dollar. Also due the weak dollar tourism will significantly increase consumption, which also negates weaker soft goods in retails and reflects positively in GDP. The fundamentals of the economy are overall strong with current weak volatile problems that will need to sort itself out over a few years. We will see slower growth in the 4th quarter as seen from shifts of spending of the consumer and inflationary pressures with high oil prices affecting gas prices taking its toll on consumer. Slow growth in the short term is also shown with less output from the service sector a major component of output. We can count housing as negligent as many people will be pricing in further defaults and a continued drag in the economy, though with current low interest rates refinancing and bottoming of dollar may start to form the first level of support for a bottom in housing, which may reflect in late 2008.

In my opinion, another 25 BP is necessary as financial markets are still facing lots of pressure and further defaults on mortgages. To not act in the face of this problem is to ignore our job as stated in the Federal Reserve Act, which is the job to manage systemic risk that may arise from the financial markets. My only concern is inflationary pressures from a weaker dollar, with high energy prices, and from producers passing on higher cost to the consumers. Under normal circumstances, a hold would be warranted, but as the US economy is still trying to pull itself out more than 1 crisis, another cut is necessary. Though do not expect more cuts as financials will improve…

Before the vote:
Is there enough room to cuts or are inflationary pressures too prevalent currently?

Is the current condition in the financials more of a media driven problem, or do actual fundamentals warrant this cut?

Does anyone see the bottoming of dollar within the next few quarter and why and why not? How will this affect housing?


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