Tuesday, September 20, 2005

The last Stand–Fed’s got it wrong, AGAIN !

Analyst says market and economy going down.
Points to change in 2 year yields for his rationale

By raising the Fed Funds Rate by 25 bp to 3.75% the Fed adds to the woes created by Katrina and higher oil prices.

To read the Fed’s statement: http://www.federalreserve.gov/BoardDocs/Press/monetary/2005/20050920/default.htm

This should be the last Fed rate rise as visible signs of a slowdown will soon become very evident.

As financial market analyst Michael Belkin notes in his recent commentary the Federal Reserve has gotten it wrong again by raising rates:

"Free market interest rates (the 2 year rates ) have led the Federal Reserve by months at the last three FOMC policy reversal points ( 1999, 2001, 2004). We dub this the 200 basis point rule (1 % (percentage) equals 100 basis points (bp)). It seems to take a 200 bp move in the 2 yr yield in the opposite direction of the Fed policy bias, for it to dawn on Greenspan and the FOMC that it is time to get off their rear end and reverse policy. This is a very different view of Fed monetary policy than that of Wall Street. They say that the Fed is the engine leading the train. We say the Fed is the caboose. Rather than second-guess every FOMC policy move, investors should watch the 2 Yr free market interest rate for a thumbs up or thumbs up on the US economy."

"Example #1 November 17, 1998, last rate cut. The previous month the 2 Year yield bottomed on October 15, 1998 at 3.83%. It rose to 5.73% an increase of 190 bp shortly before the 1999-2000 year tightening cycle. "

"Example #2 The last Fed tightening of that cycle was on May 16, 2000. The 2 Yr note peaked the next day 6.903% and fell to 4.858% the day before the Fed began tightening."

"Example #3 The last Fed cut in rates before this cycle was on June 25, 2003. The two year yield bottomed out 8 trading sessions later at 1.072%. The two year yield rose to a peak of 2.93% on June 14 2004 just before the Fed began this tightening cycle."

"If the FOMC follows its Keystone cops routine, there will be one more rate rise in the next few meetings while 2 Yr yields fall dramatically......"

"This scenario suggests that economic activity will soften....This will be a downer for stocks."

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