Wednesday, January 31, 2007

Fed Likely to Sit On The Sidelines For Awhile

The market obviously likes what it heard out of the FOMC statement, with both the bond market and stock market rallying nicely. The Dow is now up over 100 points, and the bond market has rallied also, pushing the yield on the 10-year down 5 basis points to 4.82%.

I think this moves makes sense. The bears held the thesis that if a rate cut was pushed out in time, it would be negative for the markets. But the Fed's comments simply mean that the economy is on more solid footing than previously estimated.

Add to that they expect inflation pressures to moderate, and you truly have a Goldilocks economy. And we all know what stocks are capable of in that environment.

I still think the Fed's next move will be to lower rates, not raise them. But I am content to see the Fed simply sit on the sidelines for months.


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