Tuesday, August 28, 2007

REVIEW OF FED MINUTES

Fed Minutes



The information reviewed at the August meeting suggested that economic activity picked up in the second quarter from the slow pace in the first quarter. On average, the economy expanded at a moderate pace during the first half of the year despite the ongoing drag from the housing sector. While the growth of consumer spending slowed in the second quarter from its rapid pace in prior quarters, wages and salaries increased solidly and household sentiment appeared supportive of further gains in spending. Business fixed investment picked up in the second quarter after little net change in the preceding two quarters. Inventories generally appeared to be well aligned with sales at midyear. Overall inflation receded in June because of a decline in energy prices, while the core personal consumption expenditure (PCE) price index rose a bit less than its average pace over the past year.

So core inflation is still a problem. Cutting rates will be tough in this environment.

However, a sustained moderation in inflation pressures had yet to be convincingly demonstrated.Moreover, the high level of resource utilization had the potential to sustain those pressures. The Committee's predominant policy concern remained the risk that inflation would fail to moderate as expected. Future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Can't take the foot of the inflation pedal yet.

Participants agreed that the housing sector was apt to remain a drag on growth for some time and represented a significant downside risk to the economic outlook.

Several participants noted the risks that house prices could decline significantly and that credit standards for home equity loans could be tightened substantially as factors that could weigh on consumer spending.

Something we can all agree with and that is the fragile state of housing and the negative effect it could potentially have on consumer spending.

Funding had become more costly and difficult to obtain for riskier corporate borrowers, but there had been little net change in the cost of credit for investment-grade businesses. Also, businesses in the aggregate continued to have sufficient internally generated funds to finance the expected level of real investment. Nonetheless, participants recognized that conditions in corporate credit markets could change rapidly, and that adverse effects on business spending were possible.

While top credit worthy businesses are safe for now, the Fed recognizes the risk in the corporate credit market as loans are harder to secure. An illiquid environment in corporate credit markets could lead to a big mess as we witnessed in subprime a few weeks back.

Overall it looks to me like the Fed is very unlikey to cut rates when they meet in mid September. The market has stabilized for now and unless we see another plunge to Dow 12,000 or below, rates are likely to stay the same. Fighting inflation is the Feds number one priority and a rate cut would be an impediment to this objective.

For now the market is not handling news of the Fed minutes well. The major indices are all down well over 1%. I did expect a pullback this week as I mentioned before. I expect the markets to be choppy the rest of the week.













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