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Last week, the Federal Reserve Open Market Committee, for a sixth straight meeting, said the economy seemed likely to keep growing at its current pace and voted unanimously to keep the current interest rate at 5.25%.

The central bank also softened its tone about possible rate hikes, alluding to future policy adjustments without specifying rate increases as it has in the past:

Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth.

That day, the market went wild, posting its biggest gain in months (yes, we beat the market that day). Since no one feels they can take The Fed at its word, and everyone loves to read between the lines, we have analyzed the reviews and other data to offer these observations:

The Bad News
Housing has subtracted from economic growth for the past five quarters, and lenders could cut back credit if mortgage distress rises. Distress is defaults and late payments.

The Mortgage Bankers Association said last week that delinquency rates on subprime mortgages rose to 13.3%, the highest since September 2002. Foreclosure rates on all mortgages rose to the highest level since the first quarter of 2004 (which turned out to be a great year for the market). Business spending in the fourth quarter was also weak. Corporate purchases of equipment and software declined at a 3.2% annual rate the last quarter of 2006, the most since the final three months of 2002 (and then the market took off in 2003). Shipments in January of non-defense capital goods, excluding aircraft, reduced 2.7%, the most since September 2001.

More Bad News?
Government reports this month showed unemployment fell to 4.5% and industrial production gained 1.0% in February and consumer prices rose 2.4% from a year ago.

Also found in the Fed statement:

..inflation could be sustained by high resource utilization.

This seemingly minor statement is referring to the tight job market and high rate of industrial-capacity usage. Some interpret it as a potential inflationary sign, yet the Fed removed that sentiment from its main statement.

Wait a Minute, There May Be a Reason
If our factories are humming and employment is up, will those factors catch up in other numbers? Chairman Bernanke is getting used to his job and realizing how to play his hand very close to the vest.

It stands to reason that positive consumer sentiment influenced by the Fed and the reaction of the stock market Wednesday may loosen pocketbooks, first with consumers followed by businesses. If employment is high, then there is income at most levels of the economy to pay for goods and services.

None of the above outlined circumstances is necessarily very bad or very good. Yes, we need housing and the mortgage market to stabilize. We also need to look at growth in all areas. From our perch we do not see fast drastic moves in the overall economy. The stock market moves daily on rumors and sentiment. Or is it, as they teach in business school, ever so efficient?

Taking my tongue out of my cheek, the real answers will be revealed in quarterly earnings statements, and you already know what we do with those numbers.

Have a good week.

Source: Reading Between Federal Lines on the Economy