Fed Decision Due on Tuesday

The market has another Monday to trade and as I write this (Sunday evening), the overnight futures are fairly strong trying to make a good start in the morning.  We tend to see strong Monday’s and this one looks like it wants to at least start the day on the up side.  

We think the news from the Fed will be another quarter point hike on Tuesday so why’s the market so firm tonight?  The traders think the Fed might just eliminate the measured language it has used in its policy statements over the past many meetings.  That news would signal to the market that the rate increases might be over.  We don’t necessarily agree with the logic even though we might actually agree with the outcome.  With a yield curve that is virtually flat, a higher short rate would cause them to be higher than the longer dated securities causing what is called an inverted yield curve.  

A “normal” yield curve is people charging more to borrow money for a longer period of time.  An inverted curve means the short end is higher than the long end, which is not normal, why would You be willing to long money for twenty years at a rate that is less than a one year loan?  It just doesn’t make sense to the normal person.

Inverted curves have been associated with an economy leading to a recession which is another reason the Fed doesn’t want to see it happen and may stop raising the short end just because of that.  You may have heard about the “conundrum” that Greenspan talked about recently.  The Fed has pushed up the short end of the curve and has tried to force the longer end of the curve up by doing that.  Well, since it hasn’t really worked, Greenspan calls it a conundrum.  Maybe the market knows something the Fed doesn’t.

We are looking forward to the Fed’s announcement on Tuesday afternoon and are anxious to see that way the market trades into and out of their decision and statement.  

Dow Industrials:  10,778.58   +23.46
RYVNX:  18.62
TLT:  89.54
BGEIX:  14.62