There is some light at the end of the tunnel for the stock markets and the global economy. Some experts think that Economy needs the US Fed to bite the bullet and not lower interest rates any further. This will help to control theInflation and price spiral. There are already some signs of recovery.
Oil hit another record high but has since pulled back. The dollar has finally started to show some signs of life. And for the most part, corporate earnings were pretty good.
Some companies posted surprise profits and others held the line and did not do a “Bear and Sterns” act. The worst of the credit crunch may finally be behind us. There have been no more major bombshells from financial institutions, a sign that the Fed’s six rate cuts since last September and massive injections of liquidity into the banking system may be working.
Boeing topped the earnings estimates. Ford posted a surprise profit. And even though investors Friday appear to be disappointed by the forecast from Microsoft for the current quarter, the company issued a healthy guidance for its next fiscal year.
Merrill Lynch indicated that it would pay its dividend this quarter, giving hope to investors who were anticipating a cut.
For the first time in a while, there seems to be cause for optimism about the stock markets. The Dow is trading at its highest level since Jan. 10.
The bond market is acting as if it’s not as worried about a recession anymore either.
Bonds have fallen in recent weeks, sending the yield on the benchmark 10-year U.S. Treasury to about 3.86%, up from a year-to-date low of 3.28% in January. Bond prices and yields move in opposite directions (when bond prices are high the yields are low and vice versa) and lower yields are usually associated as a sign of economic weakness.
Rising food and gas prices have confounded the consumers but help is on the way for them as well. The government’s tax rebate checks will be hitting mailboxes on Monday. This will bring some relief to the consumers. Although the economic environment is still not stable. The surging price of food threatens to disrupt not just U.S. consumer spending patterns but the overall global economy.
It’s up to Fed now:
The Fed’s policy-setting committee holds a two-day meeting next week and will announce its next step regarding interest rates on Wednesday.
I pointed out in my earlier post (Taming the Commodities Bubble) that the Fed has a great chance to show the markets that it is serious about keeping inflation in check by holding its key federal funds rate steady. This will send strong signals to the market that the Fed is serious about tackling inflation.
More rate cuts could lead to a further weakening of the dollar, which in turn, could fuel more speculation in the commodities markets and drive food and gas prices even higher. If the Fed hints at pausing the rate cuts in future it will help the falling dollar and stabilize commodity prices.
Stock Markets doubt that the Fed will pause this time around. Experts are betting on a quarter point cut. According to the latest federal funds futures price on the Chicago Board of Trade, investors are pricing in an 80% chance of a quarter-point cut.
In other words, if the credit crisis isn’t over and the housing market plunges even further into an abyss in the coming months, the central bank could lower rates again. But if the dollar stays weak and food and oil prices keep surging, the Fed might actually start raising rates later in the year.
A lower Fed rate can do more harm than good at the moment to the global economy. Although my bet is that Fed will cut rate but it will also send clear signals that it is willing to sit tight if the inflation problem grows any worse. Let’s hope it does so in the wider interest of the economy. |
