Now fast forward to the regular Federal Open Market Committee (FOMC) meeting held on September 18. By the time this meeting occurred, the investing world was almost 100 percent sure the Federal Reserve would lower the overnight rate. In a recent Bloomberg survey of 134 forecasters, 105 of them predicted a 25 basis point reduction. Only 23 predicted a 50 basis point reduction, and six actually predicted no increase at all. They were violating my little known rule that if you want to know what the Fed is thinking, listen to what they are saying.
After the Fed decision was announced, the markets, in a word, went “nuts.” The DOW Jones Industrial Average gained 335 points and was almost back to the 14000 all time high. The reason given was a lower rate is good news for stocks. The treasury market rallied as well, because if the Fed was lowering the overnight rate, rates on treasuries could also come down. Now for the confusing part! The DOW rallied because the Fed lowered rates and would probably lower them again after their next meeting. Treasuries responded for basically the same reason, except in order for the Fed to continue lowering rates, the economy would have to continue to perform poorly. If the economy is threatening a recession, why is the DOW also rallying? They both can not be correct.
Based on recent housing information, the housing debacle is not going away anytime soon. The number of homes that are going into foreclosure is only going to increase. As this transpires, consumer confidence could be in jeopardy, and remember, the consumer makes up over two-thirds of Gross Domestic Product.
By nature, I am not a doom and gloom kind of fellow, like those who insist on comparing some recent housing statistics to the Great Depression. However, I am a realist, and it appears to me that things could get worse before they get better. On the positive side, we currently have a low unemployment rate. If that were to continue, this economic correction could come about a great deal sooner than some are forecasting. Let us also not forget that the global economy appears to be doing well, and in fact the lower value of the dollar will help us sell more goods overseas.
The most important thing that has happened recently is the Federal Reserve has had a change of heart. This change of heart, to the current health of the economy, is a more pressing issue than is the fear of inflation potentially rearing its ugly head.
