360 Degrees of the FOMC

The Technical Setup
By Dan Fitzpatrick
5/9/07 2:21 PM EDT

Nothing done by the Fed. The first move is typically wrong, and we've seen a move to the downside. Looks like 1500 is holding on the S&P. Even better, the NDX is pushing through 1900.

All in all, how can you complain?

Position: net long -- no indexes though

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Dimmed Chance for Rate Cut
By Robert Marcin
5/9/07 2:29 PM EDT

The Fed seems to have tempered the bulls' optimism for an imminent rate cut. It seems to me that they want to see the whites of the recession's eyes before beginning the rate-cut process. They probably want to avoid adding fuel to the liquidity bubble fire as well. Wall Street will probably find something in the release to set off another rally, though.

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Uptrend Still in Place
By Rev Shark
5/9/2007 2:47 PM EDT

The bullish case following the FOMC statement is that the Fed has now formally acknowledged slowing economic growth, which might mean that it may be moving closer to a potential rate cut.

The bearish case is that the inflation issue is still open and may keep the Fed on hold. Also, if there really is a slowing economy, why are stocks going straight up? Are stocks ignoring reality, or is the Fed mistaken to talk about the possibility of continued economic weakness?

I'm not sure it makes all that much difference right now. The bulls still have plenty of momentum, and they aren't going to be scared away by this sort of nitpicking analysis. The upward trend is still firmly in place.

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Fed Takes Baby Step
By Tony Crescenzi
5/9/2007 2:46 PM EDT

The Fed took what some will view as a baby step toward an eventual interest rate cut today by acknowledging the recent slowdown in economic activity.

The Fed did not, as some were hoping (see my earlier note), alter its view that inflation remains "elevated," perhaps helping to explain the initial knee-jerk movement downward in stock and bond prices.

In addition, the Fed continued to describe its dominant policy concern as titled toward the possibility of higher inflation, not weaker growth. A change to that statement would have been seen as a clear signal on a future interest rate cut.

To sum up, the Fed did the minimum that it could do without giving a stronger signal toward the possibility of a near-term interest rate cut. The Fed merely acknowledged that the economy had recently slowed. That's a statement about the past and hardly a predilection about the future.

To set the table for a cut, the Fed must do the following:

1.) Acknowledge slowing in the economy.

2.) Change its view on inflation from "elevated" to something more sanguine.

3.) Change its balance of risk statement and say that its predominant policy concern is the risk of weaker growth, now higher inflation.

Steps two and three are far more important that the first step, and the Fed took a pass on these today. Here is the text of today's statement.