November 2007

Limbo

By Brad C. Stewart, Vice President/Chief Investment Officer

In the 1960’s, “Limbo” was the name of a dance that was quite popular. Two people would hold the ends of a long stick and a third person would try to go under the stick without touching it.

Another meaning of the word “limbo,” according to the New Webster’s Dictionary, is a “prison of confinement.” Because I am the author of FYI, I am going to simplify the meaning to a form of “uncertainty.” An example is; “My decision is in limbo until I have a chance to learn more about the subject.”

For months I have been telling you that if you want to know what the Federal Reserve is planning with regards to interest rates, listen. This is because they announced that they would like to be as “transparent” as the facts and conditions of the economy allow.

So why am I in “limbo?” The reason is because the facts and conditions are at odds with one another. Remember, the Federal Reserve has two charges mandated by the Federal Reserve Act, to maintain stable prices (control inflation) and maximum employment (a strong economy).

The economy may or may not be viewed as stable depending on whether you are measuring that stability by the unemployment rate or the housing industry. Inflation is also giving us room to feel comfortable, based on the current inflation index. However, oil just traded over $90 a barrel and many believe inflation will be going up shortly.

So these two charges are at odds not only with each other, but also with themselves. Under these circumstances, the Federal Reserve presidents and governors haven’t really been saying too much. As a matter of fact, some economists have commented on the independence of the Fed presidents, who are not necessarily speaking with one voice.

In the financial futures market, we currently have a 53.3 percent chance that the rate will be lowered at the next meeting on October 31. Even the futures market can be described as in “limbo.”

While I know I could end this FYI here, I am going to go out on a limb and say that I, for one, believe that at this meeting they will leave the rate unchanged at 4.75 percent.

Actually, after giving the title a little more thought, I believe another title of this month’s FYI might have been “stagflation,” from the description of the economy back in the 1970’s. While a possibility, it is probably a little premature, so we will talk more about that next month.