FED changes

Yesterday, June 25th the Federal Reserve Board (FED) made a change. The change was that there was no change. They kept a key Federal Funds lending rate (the interest rate) at 2.00%! This was an expected decision by the investment markets around the world. It did confirm however that the FED is concerned with “REAL” inflation and is not talking about the “Core Inflation Rate” as they did at prior sessions. Since the Clinton administration decided to mess around with how the inflation rate is calculated (as well as the calculation of unemployment) reality has taken a holiday! When you hear about the inflation rate you are usually hearing about the “Core Inflation Rate.” What is the “Core Inflation Rate?” Let me put it this way: someone asks me what I had for dinner last night and I tell them “A plate, a knife, fork, spoon and napkin.” No food? Food doesn’t count in the “Core Inflation Rate”. How did you get to work today? By car. How did the car move you from home to work? On wheels. Energy doesn’t count in the “Core Inflation Rate.” How are cost of living adjustments that are made by the US Government on things such as Social Security determined? Of course, using the “Core Inflation Rate.” Food and energy costs have gone up substantially in the past six months. In addition, the increased cost of food and energy are rippling through other products we buy and services we use, such as plastic products and restaurant price increases. The FED is in a dilemma! On one hand the economy appears to be in a recession while on the other hand inflation is a problem. To curb inflation you raise the interest rate. To help the economy you lower the interest rate. The current answer by the FED was to do nothing! In March of this year we moved some investment money into investment grade bonds and into high yield bonds. At the time we had seen the investment grade bond interest rates go from about 4.75% in October to 6% at the beginning of March. A bigger change had occurred with the high yield interest rates going from about 7.25% to 12%. Since that time the investment grade rates and high yield rates had been going down to 5.8% and 10.5% respectively. I told some of you that I was very cautious about how much money we should place into these investments because I was worried about inflation. I am very glad I was cautious. As of today the investment grade interest rate is over 6.20% and the high yield rate is now up over 11.40%. High interest rates are not good for business and therefore not good for stocks. Based on the above I believe that stocks will go down more and longer term interest rates will continue upward until the FED begins to raise their Federal Fund interest rate and show that they are serious about fighting inflation. At some point, when the interest rates get high enough, longer term interest rates will be a real buy!