Thursday, May 10, 2007
FED comforts the market
FED comforts the market
The FED does as expected and keeps interest rates at 5.25%.
The FED announced that it is really starting to keep an eye on inflation with a slowing economy but rising prices. It is important that the committee keep rates at the current peak to ward off any inflation threats. With Dow 13000 in full force, the government can’t risk another recession. Moreover, policy makers can’t afford a recession. House democrats might not mind however.
A move to raise interest rates would threaten the Dow’s record highs as more expensive capital often ties up the markets. Even worse is that the summer slump only compounds those effects. Raising rates slows down borrowing, and big business, operations that are profitable at a 5.25% rate may not be so profitable at 5.5%.
I still expect that interest rates will be dropped during the summer months to keep the market at its highs. I think around July the FED may take a breather and drop the prime rate a near insignificant .10% just to gauge the market response. This drop may come sooner though, although June seems out of the target.
Another barrier for analysts is the price of oil, which affects the cost of every product sold. Although the price of oil always goes up in the summer, it is not really inflation but rather market sentiment. The FED may find it tough to make a decision on rising prices that aren’t connected to high inflation.