Thursday, September 01, 2005

A Fed Pause and Its Likely Consequences

During the past 4 days the March 2006 three month eurodollar futures have rallied almost 50 basis points. This means that the market is expecting the Fed to halt its program of raising short term interest rates.

During the past 18 months the stock market has been flat to slightly higher even as the fed has raised short term rates almost 300 basis points. The last time this happened was in 1994. The last Fed increase was in March 1995 as I recall but the stock market started its upward explosion in December of 1994.

I expect a similiar outcome now. The only difference will be that the Fed halt will be only a temporary one. Once the market sees strong economic growth in 2006 it and the Fed will move toward higher rates all along the yield curve. But in the meantime, the bond and stock markets will move towards significantly higher prices.

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