And Now, the Other Side of the Fed Story

There is a case to be made for a quick turnaround in the economy.
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Punch. Counterpunch.

Last night -- I hope in a balanced way -- I presented the bearish spin on the

Federal Reserve's

latest rate cut and the stock market's ebullient reaction. In a nutshell, the concern is that although investors are betting Fed easing will reinvigorate the economy, the central bank has precious little room for additional monetary policy action should the recovery remain elusive.

Here, then, is the more bullish spin.

Dan Laufenberg, chief U.S. economist at American Express Financial in Minneapolis, says the Fed has already "discussed internally and with outside academics what monetary policy would be like under a zero interest rate environment."

A San Francisco Fed spokeswoman declined to comment on any such discussions, saying the central bank does not speak to the press during the week of FOMC meetings. The Fed's offices in Washington, D.C., were closed for the evening.

But a zero interest rate environment is only a concern "if you think the economy isn't going to recover and we're following a path

similar to Japan in the 1990s," Laufenberg continued. "I don't believe that's where we're heading."

In fact, Laufenberg predicted that the economy will resume a growth path in the current quarter, which is far quicker than most of his peers expect.

"I feel the monetary policy stimulus and fiscal stimulus we've had, and

are likely to get, is more than enough to jump-start the economy again and get us back to a path where the economy is growing to potential," he said, referring to the rate at which economists believe the economy can grow without sparking inflation. "Huge adjustments" in inventories and business equipment spending "have been made and once they start turning less negative and you get the added benefit of stimulus in place, you could have the economy come back at a rather vigorous pace soon."

In the short term, he foresees the economy growing by nearly 1% in the fourth quarter.

Too Optimistic

Laufenberg's seemingly laughable (

couldn't resist

) fourth-quarter forecast is based on the following: He believes still-declining inventories will add 1% to GDP this quarter while government spending, mainly by the federal government, will add another 1%. Consumer spending will be a slight positive, the economist predicted, believing strength in auto sales as well as improvements in same-store sales data suggest the holiday shopping season will prove stronger than expected.

Tuesday, Bank of Tokyo-Mitsubishi said its weekly retail chain-store sales index rose 0.9% in the week ended Nov. 3 after declining 1.6% the prior week. Separately, Instinet's Redbook retail sales average rose 0.8% in the month ended Nov. 3.

Trade will be neutral, residential investment "slightly negative" and business equipment spending a 0.5% drag on GDP, the economist continued.

"Add those up and you get an economy in positive territory," he said. "Sept. 11 pulled the economy into a terrible hole, but we are in the process of digging out."

Should evidence emerge that Laufenberg's forecasts are coming to fruition, it would justify the recent outbreak of optimism among equity investors, which flowered again Tuesday.

From a technical perspective, market participants were excited because Tuesday's gains left the

Nasdaq Composite

at its highest close since Aug. 29, while the

S&P 500


Russell 2000

each closed above their Sept. 10 closing levels. The

Dow Jones Industrial Average

has yet to recoup its Sept. 10 close of 9605.51, but Tuesday's close was its highest since then.

More important to technicians, both the Nasdaq and Nasdaq 100 closed above so-called downtrend lines that existed at 1730 and 1400, respectively, according to Scott Bleier, chief strategist at Prime Charter. The S&P and Dow are now in range to break their respective downtrend lines at 1165 and 9680, respectively, he said.

The Nasdaq Composite "is now sitting above its 20-week moving average, a trend line it hasn't closed substantially above since mid-July," added Schaeffer's Investment Research in Cincinnati.

In fact, recent action has shops such as Schaeffer's rethinking their views on the market. On Monday, the firm adopted a "neutral" short-term market stance vs. bearish previously, and more gains would likely compel them to go bullish.

But it should be noted the firm maintains a long-term bearish stance adopted Feb. 27.

Push & Shove

While I'm here to provoke thought, not predict the future, I'm going to oblige those of you who have asked repeatedly that I take a stand.

So here goes: As discussed

previously, I do believe there's merit to Laufenberg's economic optimism, even if he's expecting growth a quarter too soon (at least). I do expect the holiday shopping season will exceed expectations for two reasons. First, Americans do few things better than spend money, even if it's on credit. Second, Americans will be particularly eager to spend this year to prevent the terrorists from dampening the holidays more than they already have.

Furthermore, by lowering long-term rates, the decision to eliminate the 30-year provides a

fundamental rationale for bullishness on equities, at least for now. Another support factor comes from my sense that most investors still prefer to be in equities, as the alluring memory of the 1990s bull market remains strong despite the ongoing bear market, now some 20 months old.

But to reiterate what I wrote on

Sept. 28: Investors should be wary of confusing a short-term trading rally with the start of another long-term bull run, because it's doubtful government stimuli will revive Goldilocks.

The pick here (still) is the economy will get too hot, causing the Fed to tighten again. But should it remain too cool, the central bank has precious little reserves left to spice it up.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.