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The Alan Greenspan Economy The Fed's Lack of Action on the Economy: As Alan Greenspan turns over the keys to the new Fed Chief, rumors are rampant on how the new Federal Reserve leader will battle the dangers of inflation and rising interest rates. But the real question is: How will this all affect Wall Street and investors? What an extraordinary non-event. The Fed did none of the things the rumor-mongers hinted it might: it did not lower rates, it did not hold even, it did not go to 4% in one "swell foop." Heck, it didn't even change guidance much: it sees no persistent economic danger of inflation, but continues to perceive enough non-threats that could become dangers to continue raising US interest rates. I could argue 'til the cows come home as to whether or not this indicates a perception of strength or weakness, and whether or not the market is stronger or weaker now that they have done the non-deed. Targeting Interest Rates It's no secret that I have felt for some time that an overly loose monetary policy was an enormous threat. But I don't run the Fed, and everyone wants to talk about the guys who do (in fact, I have three radio interviews lined up this week on exactly this topic), because everyone wants to talk so much about it. So here is my call for the next few FOMC meetings: there are three of them scheduled between now and January 31, when Mr. Greenspan's final term ends. At one of them, they will raise rates to 4%. This has been my predicted target for the end of this year for quite some time (although for a while, I thought he would get there before the end of summer. I was wrong by a mere quarter point). What the Fed’s Economic and Investment Inactivity Means for You My logic is considerably more straightforward than most of the twisted tales you will see and hear today. For almost a decade under the Alan Greenspan economy, Mr. Greenspan has labeled 4% as "inflation neutral." Alan knows he is done. He is basically taking the car out of gear before stepping out and handing over the keys. Beyond that, Greenspan knows that the next chairman (as yet un-named... hmmm. Imagine what would happen if Mr. Bush fills this position as slowly as he has filled so many other positions?) must promise the White House either a cessation of increases – if not an out and out cut – in order to secure the position. With the Alan Greenspan views on the economy, I think he would rather see a cut from 4% to 3.75% than an immediate return to the days of 2% or less that almost (or perhaps may have already) ruined the U.S. dollar. |
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