It’s What The Fed Didn’t Do, Not What It Said
As expected, the Federal
Open Markets Committee kept its target for the federal funds rate
unchanged at 1.25% when it met Tuesday. However, in an uncharacteristic move, the Committee
refrained from issuing a bias and, instead, stated that it cannot “usefully
characterize the current balance of risks with respect to the prospects for its
long-run goals of price stability and sustainable economic grow.” This is
unusual, as the Fed doesn’t like to surprise the financial markets with
unexpected rate adjustments and therefore issues a bias to indicate the likely
direction of any future policy decisions.
Through its inaction–not issuing a
bias–the Fed is basically telling the markets that it genuinely believes that
the uncertainty surrounding a war with Iraq is what is keeping the US economy
from from moving ahead, and it is not merely trying to talk the markets up with
positive rhetoric. If the Fed thought otherwise, it would have maintained its
easing bias–as the outcome of the war with Iraq will make no difference to the
economy, and not subject the markets to unnecessary volatility.
For those investors who currently believe that a
quick and successful war will be the impetus for economic growth, look for the
industries that will directly benefit from a combination of lower oil prices and
increased demand, such as the higher dividend yielding chemicals–be selective
though: see my
March 4 article–and transports.