Tuesday, August 10, 2004


Fed's rate increase impacts markets positively.

The Fed's increase of the overnight lending rate .25 bps to 1.5% bolstered financial markets. Since the rate increase was expected and already built into rates, the 10 year bond market yield only gained 3 bps. Stocks on the other hand rebounded significantly with the Dow up over 130 points and the NASDAQ up 34.06. Oil prices also dropped, but only after posting a new high at slightly over $45 per barrel.

The Fed's move told the markets they considered the unexpected financial numbers of last week as only a blip on a larger economic recovery. Had they kept rates the same, it would have sent a lot of bad signals to the markets and stocks could have dropped as much as they gained.

Even if the Fed is correct about a recovery, a continued increase in energy prices has them worried. It should be noted that these higher oil prices are from September's futures markets, so the repercussions of this price increase has not yet been felt at the fuel pump. If the employment numbers and consumer spending remain weak, rates may hold at next month's FOMC meeting. We'll have a better glimpse of employment when last weeks numbers hit Thursday.

This report brought to you by the Herzing College business administration degree.

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