Are we without anything that should interfere with that thinking? Of course not! I listed several concerns in the economic overview, which can be found in Mid-Atlantic Corporate’s Second Quarter Financial Statement that will be mailed to members shortly. The main concern is the War in Iraq and the threat of a terrorist attack on U.S. soil. The housing industry’s turmoil certainly qualifies as a concern as well. The price of oil is yet another. But when all is said and done, the Federal Reserve’s two main concerns, the economy and inflation, continue to look positive.
The evidence of this is the fact that the Federal Reserve has maintained a 5.25 percent overnight rate for the past year. The estimates or predictions (refer to last month’s FYI for my thoughts regarding predictions) are for the Federal Reserve to be “on hold” well into 2008. If the pause in rate increases goes longer than 18 months, it will surpass the 1997-1998 period. This is the “neutral” the Federal Reserve set out to achieve years ago, when it began raising the overnight rate from 1.0 percent to the current 5.25 percent. A “neutral” rate means that the economy isn’t too hot to create inflation, but not too cold to slow the economy and risk a recession. The “Goldilocks” economy we have been dreaming of.
Another strong piece of evidence is the stock market’s rise to an all time high. I believe that if the economy is the patient, and the stock market indexes; such as the Dow Jones Industrial Average (DJIA) is the heart monitor, then this patient appears to be doing just fine. A reading of 14,000 certainly is impressive.
Another sign that we have been a little too pessimistic is the treasury yield curve. This yield curve can be described as the treasury rates on securities from three-month treasury-bills out to ten-year treasury notes. In June, the curve became slightly positive. Actually, today’s curve, while only slightly positive, could almost be described as flat, as the pick-up from one maturity to the next is quite small. A positive sloping curve, with rates increasing as you invest out longer, is considered normal. However, a negative yield curve is often associated with a pending recession, anticipating that the Federal Reserve is going to lower the overnight rate to stimulate the economy.
That is not the case today. Today the curve is telling us that the Federal Reserve is quite comfortable with the overnight rate where it is, so “don’t worry, be happy!”
