4/30/2008
By Brian Sozzi

WSS Observations: 7:00 AM

Showtime!  Today, the market receives the latest decision on interest rates from the FOMC and for the first time in a while there is a bit of uncertainty heading into the much ballyhooed release.  An interest rate haircut of 25 basis points has been priced in, but the language accompanying the decision holds much more weight.  Key wording in the prior policy announcement issued in mid-March included 1) economic activity has weakened; 2) growth in consumer spending has slowed; 3) labor markets have softened; 4) financial markets remain under considerable stress and 5) inflation has been elevated, and some indicators of inflation expectations have risen.  One should expect the statement to hint at conditions in the financial markets stabilizing modestly due to the Fed’s liquidity fostering actions while a nod to a faster pace of inflation expectations is provided.  The latter should help to signal the general conclusion, for now, of the Fed’s interest rate cutting cycle.  If this scenario holds true, look for the dollar to strengthen, commodity stocks to continue to trade under pressure, and possibly for the market to trade higher.

WSS Observations: 4:00 PM

Intriguing is a fairly valid word to use in summarizing the Fed's policy statement issued today.  Comparing the fresh release against the one from March 18, we were struck by the following items: (1) first paragraph hinted at stabilization in the credit market and perhaps the economy; (2) a nod to advancing inflation expectations was provided, as we expected, but it was noted that inflation expectations had risen in recent months rather than just “risen”; (3) third paragraph seemed as a means to stress to the market to a higher degree the substantial actions undertaken by the Fed to foster market liquidity and (4) language was removed that downside risks to growth remain.

In summation, the market essentially received what it wanted heading into the release, that is the interest rate spigot would not be opened further, at least for now, which should cool the run in commodities.  But has this been a case of be careful what you wish for?  The Dow Jones Industrial Average is now only slightly higher after being up in excess of 100 points prior to the policy decision.  Perhaps the market is reading the situation as despite economic weakness the Fed will stand pat on interest rates if inflation expectations become even more embedded.  Hey, we told you earlier that Fed policy release days were zany, and today is turning out to fit the mold.

Wall Street Strategies