Here’s what the market thinks the Fed should do
Examining the Technical
Conditions in order to Determine what the FOMC Should do About Interest Rates
The Federal Open Market Committee will meet
tomorrow. As always before a meeting, the pundits start to weigh in on what they
think the Fed should do with rates. Most people are assuming that they will
raise by another quarter point. Let’s look at some charts that perhaps could
guide them in their decision.
First, let’s review the price chart of the
ten-year treasury as represented by
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PowerRating) (Treasury Bond, 7-10 year iShare).
Rates obviously for these maturities have come off of their lows from the summer
of 2003. The Fed has been quite effective in getting short-term rates higher,
and, when looking at this chart, it seems as if they have indeed engineered a
“soft-landingâ€.
Now for the conundrum. If you have ever studied
economics, you may remember that long-term rates are a representation of what
investors anticipate long- term rates (inflation) should or will be. It is very
difficult for the Fed to manipulate long-term rates and the assumption is that
they will follow short-term rates. The
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Fund from iShares. As you can see, it, too, is off of its highs. Unlike the 7-10
year, it didn’t peak until this past summer. The next natural question that we
may ponder is, “Have long-term rates come up enough in order to slow the pace of
inflation?†Well, to answer that we probably need to examine some charts that
may represent inflationary/deflationary pressures in the economy.
First, I am going to look at the Reuters Jeffries
CRB Index (CRB). In November, the index actually broke through its support,
signaling lower commodity prices (less inflation). However, much of this was
likely due to falling oil prices, as both precious and manufacturing metals have
made new highs. As you can see, the index has regained its support but is now
facing some stiff overhead resistance.
Next, let’s turn to the Gold Continuous chart
(GC). Wow. If rising gold prices are inflationary, then we are definitely in for
some inflation. However, something is not quite right with gold’s ascent.
Typically, when gold rises, the dollar falls. A
falling dollar is inflationary while a rising dollar is deflationary. As this
chart shows, the dollar is rising. In fact, its’ trend turned positive at the
peak of long-term rate prices. A rising dollar should keep inflation under
control.
So what should the Fed do knowing this
information? Where do the risks lie? The inflationary pressures are obviously
coming from rising commodity prices, however, as stated above, the rising dollar
should help balance these pressures. However, I do tend to believe that the
risks are still more heavily weighted towards rising prices and that they should
raise rates (at least one more time). If the commodity index fails at the
overhead resistance it now faces, then the FOMC can stop raising rates and,
perhaps, “neutral†will be reached.
Sara Conway
Sara Conway is a
registered representative at a well-known national firm. Her duties
involve managing money for affluent individuals on a discretionary basis.
Currently, she manages about $150 million using various tools of technical
analysis. Mrs. Conway is pursuing her Chartered Market Technician (CMT)
designation and is in the final leg of that pursuit. She uses the Point and
Figure Method as the basis for most of her investment and trading decisions, and
invests based on mostly intermediate and long-term trends. Mrs. Conway
graduated magna cum laude from East Carolina University with a BSBA in finance.