The Market’s ‘One – Two Punch’ Hope

October 8th, 2006

The market seems to be hoping for two trends to play out, a slowing economy that won’t slow too much, and falling inflation, due to the slowing economy, thus inducing the Fed to lower rates.  Basically, the Goldilocks scenario. But a disconnect between the Fed and the market currently exists.  The Fed seems to publicly acknowledge that the economy is slowing, but think that it will be mild and thus not enough to lower inflation.  If you listen to recent Fed policy speeches, Fed members are more concerned about the inflation threat than the slowing economy threat.  This suggests we are in a tightrope environment where expectations for a Fed rate cut are overdone.  The Fed may be in a rate holding pattern for some time, and rate cuts in January and March may seem less likely in a few months.

Entry Filed under: The Market

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