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Contributors: Douglas McIntyre Jon C. Ogg

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Wednesday, September 20, 2006

Why the Fed Should Be Out of the Picture

The FOMC decision on interest rates will be out around 2:15 PM EST. Expectations are for no rate change, and it is getting harder and harder to find anyone credible that expects any rate changes ahead. There are still market pundits that have taken the “Fed is just on pause” stance, but they are getting harder and harder to find. Now most of the street is just trying to figure out when the first rate cut will be when the Fed figures out it went too far.

What is almost comical about this FOMC meeting is that this is perhaps the least covered by the media and the least cared about meeting since the near-0% policy was instated after September 11, 2001. Since the Fed went from the free-money policy where the carry-trade was a huge money maker, they are now at an inverted yield curve. The inverted yield curve implies what has historically been a greater than 50% chance of a serious slowdown and can indicate even worse.

If you notice the “can” and the “chance” wording, it is because the statistical data is in the rearview mirror. It is no different than trying to say that September is always a bad month for the stock market. Here we have gotten to within sniffing distance of new highs in the DJIA and the S&P 500 indexes.

You now have to back to before April to find lower yield on the current 10-year Treasury yields. I have spoken with bond brokers that cover banks and they have all concurred that banks are squeezed for yield. With the consumer reportedly being close to tapped out or at least not as able to use their home equity as a piggy bank, you just have to think the Fed is out of the game. If Bernanke & Co. do anything surprising, then the market is going to feel at a total loss for words. They have done their job, and the street has informed them of this.

Yesterday’s PPI has proven to be tame and the oil and metals prices have all but fallen off of a cliff compared to their mid-summer levels.

Let’s hope they got the memo.

Jon C. Ogg
September 20, 2006
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