Moving Forward

When the world gets caught up in these Fed movement cycles, the fixed income world gets stuck waiting from meeting to meeting to see what will happen. It remains to be seen if the equity market gets stuck in that rut as well, given the primary driver of the Fed Funds rate cut. It looks like Bernanke and Co. want to show that he could be Alan Greenspan too, opting for 50bp cut when 25bp would have been enough for now. Ben is betting that inflation remains low (anyone that has been to a supermarket recently would question that). He is also betting that despite lower rates, the markets will punish those that made bad decisions, particularly on credit issues. Both will probably hold for now, but as mentioned in this blog yesterday, it is the period a few years out that may be the problem. Left to its own devices, the economy will do fine and any excesses will work themselves out. From now until the end of 2008, that will be the case. The Presidential election next November will have tremendous impact going forward. Many of our current tax schemes expire in 2010 and it remains to be seen what we'll have after that date (Look at New Jersey as an example of bad tax policy; imagine that on a national level). The Fed itself can't change everything; many items domestically and an increasing number of foreign items are beyond their control. But over-stimulation leading to inflation could push politicians in the wrong direction.