Fed Has Lost Control Over Interest Rates

For the Federal Reserve, this dollar scenario moves the focus of policy away from managing domestic interest rates in order to control U.S. inflation and growth in the U.S. economy. The new focus has to be on keeping the overseas investors and bankers who hold so many of our IOUs relatively content with their massive U.S. dollar holdings.

Cuts Less Likely

Domestically, an interest rate cut in 2007 is still on the table. The economy could slow enough so that such stimulus would be appropriate.

But globally, to a Fed that increasingly has its eye on the value of the U.S. dollar, I think an interest rate cut in 2007 is on the edge of falling off the table. And if the dollar declines a bit more, that option will tumble right off the table. The Fed simply would not have the luxury of putting the domestic economy ahead of the interest of the overseas investors and banks that hold so many U.S. dollars.

New Developments on Past Columns

"Five Buys for a Fourth-Quarter Rally": Sometimes it's not so much what a company announces as when it announces it.

American Eagle Outfitters(AEOS) had the misfortune to announce same-store sales growth of 14% for November on Nov. 29, just when Wall Street was feeling the heebie-jeebies about holiday retail sales.

At other times, 14% growth would have been a great number, especially since competitors Abercrombie & Fitch(ANF) and Wet Seal(WTSLA) reported same-store sales growth falling by 3% and climbing by just 5.5%, respectively, for the same period.

But Wall Street was expecting 14.8% growth and was additionally disappointed that the company merely confirmed, but didn't raise, its fourth-quarter earnings guidance of 94 cents to 96 cents a share. The Wall Street consensus calls for earnings of 97 cents. Frankly, I don't see anything in these numbers to make me change my target price for the stock. As of Dec. 5, I'm keeping my target price of $51 by February 2007.

At the time of publication, Jubak did not own or control any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

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