Thursday, February 01, 2007


Not sure the iambic pentameter is working here, but hopefully the title catches your attention to the onslaught of data and the Fed. Stronger than expected GDP despite a 19% drop in residential investment, which took 1.2 percentage points off of growth, and an FOMC statement that moved the Fed from Dec's worrying about growth to confidence that the economy will grow -- while acknowledging that inflation has ebbed.

The market, in its infinite wisdom, rallied on the news, believing that the comments on inflation were setting the stage for an ease later this year. Since December, the market has moved its ease scenario out in time and down in its extent, but it is still betting on an ease beginning in August but definitely by December. Some of the market gurus, mostly wrong but never in doubt, are out there pitching the idea that softness is to come, 4th Q was a statistical anamoly, and look for an ease by July.

Markets want to read into to the statement what they want to believe. I believe something different. The Fed is telling us that the concerns they had about growth are past or at least passing, so they can be more confident in their forecast of continued moderate growth. As for inflation, they acknowledge the drop and they know it is energy related. They are also saying that resource use is tight and thus the risk for inflation remains.

So, tell me, if the Fed is confident about growth, which means greater utilization of resources, why does the market think the next move is an ease?

Two things to remember about this economy. First, it runs on credit and there is plenty available. Second, this economy is "adapt and grow". It has adapted to 5.25% funds, which is not restrictive, and so the economy is ready to grow. I believe that, the Fed believes that, the market savants that were convinced of a consumer implosion and recession last year -- don't.