Fed Decision, Notable Changes, and Economist Reactions

by: SA Eli Hoffmann

Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:

Fed Again Leaves Rates Unchanged [Wall Street Journal]

Summary: The U.S. Federal Reserve left short-term interest rates unchanged for the third consecutive month yesterday, but warned "some inflation risks" remain. "Going forward, the economy seems likely to expand at a moderate pace." Core inflation remains "elevated" but tempered by lower energy prices and the impact of previous rate increase; at 2.9%, core inflation is at its highest level in a decade. On the other hand economic growth seems like it will come in at about 2% for Q3, its second-lowest since 2003; it has fallen under the weight of falling home and auto sales. In recent weeks energy prices have plummeted, and the Fed expects thi s will eventually lead to a drop in core inflation. Key differences in the wording of yesterday's press release: (1) The passage on "moderate growth" is new and "neutral sounding." (2) The Fed removed its reference to commodity- and energy-based inflationary concerns. Selected economist reactions: (1) "The Fed has effectively thrown cold water on the notion that the next move will be lower rates." -- Outlook Group (2) "They want to show the markets that in the unlikely event that growth re-accelerates, they have left the door open to another hike." Ian Shepherdson, High Frequency EconomicsIan Shepherdson, High Frequency Economics (3) "We continue to expect a near term reacceleration of growth triggered, in large part, by the recent plunge in fuel prices. And, we expect core inflation at the consumer level to drift higher. From our standpoint, such developments are likely to bring the Fed -- which still retains a tightening bias -- back into the game in early-2007." -- Morgan Stanley U.S. Economics (4) "By projecting that, "Going forward, the economy seems likely to expand at a moderate pace," we see the Fed as signaling that a rate cut in the foreseeable future is very unlikely." -- Bear Stearns U.S. Economics
Related links: The Fed's September statement and Yesterday'sMore economist reactionsFed 's Rate Pauses Prompt Banks to Cut Deposit YieldsFed Will Decide Policy Based on Bond Market Performance • Bloomberg commentary: Fed May Keep 5.25 Percent Rate for Quite a While: John M. Berry
Potentially impacted stocks and ETFs: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF) • iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT) • S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM)

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